The bond market has been going through ups and downs lately, similar to what we’ve seen in stocks. These movements are happening because of new trade tariffs and disagreements between President Trump and the Federal Reserve (the “Fed” – America’s central bank). These factors have pushed interest rates and bond yields higher. While short-term market swings can be unpredictable, it’s helpful to remember that such periods happen from time to time, even if the reasons differ. If you’re someone who relies on bonds for regular income, the current situation might present both challenges and opportunities for your financial planning.
The bond market has been going up and down a lot
One main reason people mix different investments in their portfolios is that stocks and bonds usually don’t move in the same direction. When stocks go up, bonds often go down, and vice versa. This happens because stocks typically do well when the economy is strong, while bonds often perform better during uncertain economic times. By combining stocks, bonds, and other investments, you can create a more stable portfolio that improves your chances of reaching your financial goals.
So what’s going on with bonds right now and why should you care? Sometimes there are periods when markets behave differently than usual due to big economic or policy changes. For example, bond prices can swingwhen markets adjust to major changes like the current situation with tariffs and questions about the Fed’s independence. With tariffs, bond investors are trying to figure out two possible outcomes: trade disputes might increase prices (which is usually bad for bonds) and/or they might slow down economic growth (which is usually good for bonds).
Other factors like concerns about market liquidity, investors possibly moving away from U.S. investments, and technical market factors have also contributed to recent changes. The U.S. dollar has fallen alongside bonds, which is unusual since higher bond yields normally attract foreign investors. The chart shows that bonds have been more volatile not just in recent weeks but throughout the past three years.
While there are many events affecting bond market movements, they all come down to greater uncertainty about government policies. Bond prices depend heavily on where interest rates and the economy are headed, and also on how uncertain that path might be. Just as recent government decisions about trade have made it harder for households and businesses to plan ahead, it’s also harder to predict where economic factors might be in the near future. This includes uncertainty about what the Fed will do next, which is made worse by headlines about President Trump and Fed Chair Powell disagreeing. So it’s not surprising that bond prices have been moving up and down along with stocks.
Bonds have still helped keep portfolios steady this year
It’s important to keep some perspective. The 10-year Treasury yield (a key benchmark for interest rates) is currently around 4.3% – well within its normal range over the past two years. In general, interest rates are higher than many investors thought they would be at the beginning of 2025.
Despite this uncertainty, most types of bonds are still showing positive returns this year, including the U.S. Aggregate Bond Index, Treasury bonds, and investment grade corporate bonds. High yield bonds (sometimes called “junk bonds”), which often move similarly to stocks, are only slightly negative.
These returns show that corporate bond investors are distinguishing between higher and lower quality companies as economic uncertainty continues. Corporate bond “spreads” (the extra yield these bonds offer compared to Treasury bonds) are one way to measure this. The spreads for investment-grade bonds (issued by financially stronger companies) have stayed relatively narrow, while spreads for high-yield bonds (issued by financially weaker companies) have widened considerably. However, these spreads are still much narrower than during previous financial crises like in 2008, 2020, and 2022.
Municipal bonds (“munis” – bonds issued by states and local governments) have also experienced more volatility recently. The “muni ratio,” which compares municipal bond yields to Treasury yields, increased when the tariff announcement was made and remains high. This higher ratio means that municipal bonds are more attractive today compared to Treasury bonds, especially for investors who pay higher tax rates or live in states with high taxes.
Bond yields continue to be attractive
No matter how bond prices move in the coming weeks, bond yields remain attractive compared to the past twenty years. This creates opportunities across the bond market for people who need income from their investments. For example, investment grade corporate bonds currently have an average yield of 5.3%, compared to an average of 3.8% since 2009.
Bonds may also look favorable because the Fed is expected to lower interest rates again later this year, regardless of how the disagreement with the White House turns out. For investors focused on income, current yields are attractive across many types of bonds and can help support portfolios during ongoing uncertainty.
The bottom line? Policy headlines continue to shake up financial markets. While bonds have been volatile recently, their attractive yields and generally positive returns can help long-term investors reach their financial goals.
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