Three Major Questions Facing the ‘Beautiful’ Bond Market

Polo Rocha

Thu, Apr 10, 2025, 9:19 AM 5 min read

• The usual relationship between stocks and bonds—bonds go up when stocks go down—broke down this week amid tariff uncertainty, leaving some investors wondering what caused the tumult.

• Investors could have sold their bonds because they forecast high inflation and interest rates ahead.

• Foreign investors could be dumping their Treasury holdings in the wake of the U.S.'s aggressive tariff policy.

• Hedge funds could also be trying to exploit the differences between current bond prices and futures.

The bond market may indeed be “beautiful,” as President Donald Trump declared after a historic day for markets. But it’s also a little confused.

Bond markets stabilized some Wednesday on the news of Trump’s 90-day reprieve on punitive country-by-country tariffs. But, some big questions for bond investors remain unanswered. Will the tariffs that Trump stuck with—or escalated in China’s case—prompt an inflation rebound? And has Trump inflicted permanent damage to global investors’ demand for U.S. government debt?

The questions are relevant far outside of Wall Street, since bond markets affect mortgage rates for homebuyers and are a key part of retirement portfolios. U.S. government bonds also underpin the global financial system, and this week’s turbulence showed some cracks that may not be patched soon.

“Unfortunately, Pandora's tariff box is open, and the 90-day reprieve still leaves massive uncertainty on the table,” Andrew Brenner, head of international fixed income at NatAlliance Securities, wrote in a note to clients on Thursday.

Bond volatility is “off the charts,” he added, pointing to the massive jump in the interest rate on bonds this week. Traders are still scratching their heads about the precise reason or reasons behind the volatility.

The simplest explanation behind the turbulence is that tariffs make imported items more expensive. Inflation would force the Fed to keep interest rates high, which the Treasury market is sensitive to.

Though Trump has backed off on punitive country-by-country tariffs, he’s nonetheless imposing a blanket 10% tariff on most countries and has ramped up China tariffs.

“The inflation outlook…remains very uncertain, and the risks mostly lie to the upside,” Samuel Tombs, chief U.S. economist at Pantheon Macroeconomics, wrote in a note to clients.

If prices rise on a one-off basis, the Fed may be able to overlook that as temporary. But it’s more concerning if price increases feed off each other, particularly since inflation hasn’t fully returned to normal after its post-COVID spike.