MW Bonds are on sale amid market mayhem

By Brett Arends

This could be a bargain opportunity for retirees, near-retirees and anyone else who needs steady and stable investment income

Weird things can happen inside a market crisis. Things that you'd expect to go up in price go down instead, and vice versa. The normal relationships between financial assets can break down. A kind of quantum financial physics seems to take over.

It may be happening right now in the bond market, and if so, that represents a bargain opportunity for retirees, near-retirees and anyone else who needs steady and stable income from their investments.

Bonds are IOUs issued either by the United States government, state and local governments, corporations, or their foreign equivalents. They are generally seen as safer investments, at least over shorter periods, than stocks for a number of reasons - both technical and legal.

Let me start with the numbers, because that's what most people really care about, and then look at what may be behind them.

As of late Tuesday, you could buy 2-year U.S. Treasury bonds BX:TMUBMUSD02Y paying 3.7% interest, 5-year Treasurys BX:TMUBMUSD05Y paying 3.9% and 10-year Treasurys BX:TMUBMUSD10Y paying 4.3%. Investment-grade corporate bonds are paying up to 7.6% over 10 years. Top-rated municipal bonds, which come with the additional bonus that the interest is (generally) exempt from federal income tax, are paying up to 5% over 10 years. As the marginal buyer of municipal bonds will be those subject to the top rate of federal income tax, and that rate - even if the 2017 tax cuts are renewed - will be 37%, this means these bonds are paying a "taxable-equivalent yield" for rich investors of nearly 8%.

All of these bond yields are much higher than they were Monday morning. In many cases, they are higher than they were when President Trump launched his "liberation day" tariff festival last Wednesday. The bond market plunged Monday, and bonds are like seesaws: When their price falls, their yield or interest rate rises.

Among the benchmark bond index funds offered by iShares, the iShares Core U.S. Aggregate Bond ETF AGG is now down 1.8% so far this week, when compared with Friday's close. The iShares 7-10 Year Treasury Bond ETF IEF is off 1.7%. The iShares iBoxx $ Investment Grade Corporate Bond ETF LQD and the iShares National Municipal Bond ETF MUB have both fallen about 3.2%. The iShares 20+ Years Treasury ETF TLT is down nearly 5%.

Does this make any sense? This comes as many CEOs think the U.S. economy has already tipped over into recession, the money markets are expecting the Federal Reserve to slash short-term interest rates by a full percentage point by Christmas to a range of 3.25% to 3.5%, and the markets have also - rightly or wrongly - slashed inflation expectations. They now see inflation averaging 2.3% over the next five years and 2.2% over the next 10 years. In these circumstances you might expect that bonds, which jumped in the immediate market panic late last week, would at least be holding up, if not rising further.

Bond-market observers are scratching their heads. Some say the big bond-market move is the result of rising inflation fears as a result of President Trump's tariffs.

"Tariffs are inflationary," Joachim Klement, investment strategist for Panmure Liberum in London, tells me. In the immediate panic after President Trump's April 2 announcement, he says, investors forgot that, and rushed to buy bonds at higher and higher prices. But that, he notes, "makes no sense." Higher inflation should be bad for bonds, because it will erode the real value of future bond interest-rate payments. The fall in bonds since the weekend is more rational, Klement adds.

Other commentators also point to other technical factors, such as the unwinding of risky hedge-fund bets on interest rates.

Still others suspect that some investors have been selling bonds to cover losses they had made on the stock market at the end of last week.

Another portfolio adviser, who was perhaps most honest of all, told me privately he had no idea why the bond market was really down.

Oh, and it is also possible that the markets are nervous about the politics of interest rates in the U.S. and the independence of the Federal Reserve.

All or none of these reasons might have some truth to them. There is as yet little evidence of inflation panic from the bond market. I wonder if tariffs, by adding hefty costs to consumer products, might be more inclined to cause a recession than persistent inflation. If someone adds, say, $200 to the cost of every smartphone, it's always possible that U.S. consumers will keep buying the same number of phones and just reach into their magic, infinitely expanding wallets to pay an extra $200. But it seems just as likely- to me, anyway - that they might instead respond by buying a cheaper phone instead, or none at all - and just make their current phone last another year or two.

Who knows?

But at times like this, I feel like a sports reporter who has sat through more games than I can recall. No two games are identical, and I'm wary of making the astrologer's mistake of seeing patterns where there aren't any, but some things do seem to happen over and again. And I remember that similarly weird, if brief, moves in the bond market also happened in two previous sudden financial panics.

Treasury bond prices plunged at one point during the 2008 global financial crisis. And they plunged during the depths of the COVID crash in March 2020. Both bond selloffs were brief. Both proved buying opportunities. In late November 2008, you could have bought inflation-protected U.S. Treasury bonds paying a guaranteed interest rate of inflation plus more than 4% a year for seven years, and inflation plus more than 3% for 20 years. These yields were, to use a technical term from the bond market, absolutely barking mad. It was like someone coming up to you in the street offering you money.

Afterwards, analysts came up with various explanations. The most often repeated was that investors who had to raise cash in a panic all rushed to sell their longer-term bonds - at any price.

But whatever the reason, it offered an opportunity for ordinary investors. Only time will tell if the latest mayhem in the bond market will turn out the same way.

-Brett Arends

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April 08, 2025 18:52 ET (22:52 GMT)

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