Weekly Buzz: Why the bond market may have forced a pause on tariffs🚦

5 minute read

American bonds were sold off last week – creating an unusual market scenario that may have forced the US president's hand on all those tariffs. Here’s a closer look at what happened, and how it might have affected your investments.

Tariffs? "Not so fast," said the bond market

Bond yields (the return you get) move opposite to bond prices – when prices fall, yields rise as investors want higher returns for the perceived risk. Typically, US Treasuries are seen as ultra-safe investments.

That’s why what we saw last week was rare: bond yields surged despite the stock market drop. The trifecta of retreating stocks, a weakened dollar, and rising bond yields had market watchers start whispering: "sovereign debt crisis?" – the situation where a country struggles to service its debts. When investors demand higher yields despite the market uncertainty, they're essentially charging the government more to borrow, also suggesting concerns about debt levels or inflation.

That financial fire alarm may have spooked the White House enough to slam the brakes on its freshly announced reciprocal tariffs with a 90-day timeout. Despite the pause, the bond market continued to show stress, with 10-year yields rising to their highest level since February and pushing bonds toward their worst weekly loss since 2019.

What’s the takeaway?

Consider last week the bond market's equivalent to the White House of "we need to talk." While America's underlying economic engine has continued to chug along, these events have had investors taking a fresh look at their US exposure – not abandoning ship, but certainly checking the lifeboats.

For investors, this reinforces a core principle: diversification beats overconcentration in any single market. While US assets remain key components of a balanced portfolio, recent turbulence shows why exposure across multiple regions and asset classes makes for a more resilient portfolio. Take our General Investing portfolios, for example – diversification was a key driver of their returns in the first quarter of the year.

While the latest inflation readings in the US are easing, the average shopper is expecting prices to climb. This mismatch between economic data and public perception is creating quite the headache for the folks at the US Federal Reserve (Fed).

The latest US inflation figures are cooling – down to 2.4% in March when forecasters expected 2.6%. Even core inflation – which excludes volatile food and energy prices – came in at 2.8%, its lowest reading since March 2021. By the numbers alone, the Fed's campaign against inflation is working.

Yet, American households are convinced that higher prices are just around the corner – a rational response to tariffs that will filter through supply chains and onto price tags in the coming months.

Now, a key purpose of a central bank is to maintain inflation targets while encouraging growth – already a balancing act in normal times – and this mixed outlook puts the Fed in an even tougher spot. It will have to decide whether to stay focused on inflation and keep interest rates high, or to cut borrowing costs and give the economy a bit of a leg up amid flagging consumer sentiment.

📖 Simply Finance: Sovereign crisis

A sovereign crisis is when a country struggles to pay its debts. When investors fear a nation can't meet its financial obligations, they rush to sell that country's bonds, causing borrowing costs to spike. This creates a dangerous cycle: higher interest makes the debt even less manageable, potentially forcing the country to seek international bailouts, or in extreme cases, default on its debt entirely.

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