MW Bonds struggle since 'liberation day' tariffs, but Fed is in no rush to cut rates

By Christine Idzelis

Trump's 'reciprocal' tariffs were larger than the Fed anticipated

The U.S. bond market has been in rough patch since President Donald Trump announced his "liberation day" tariffs, with Federal Reserve Chair Jerome Powell appearing in no hurry to lower interest rates amid uncertainty over where the large levies will ultimately shake out.

The global trade war has kept market volatility high, with riskier corporate debt and long-term Treasurys faring worse than the broad U.S. investment-grade bond market since April 2 - the day Trump revealed his plans for "reciprocal" tariffs. The levies were larger than the Fed expected, even in its "upside case," Powell said Wednesday during his discussion on the economy and monetary policy at the Economic Club of Chicago.

Investors, on edge over the risk that tariffs will slow the economy and increase inflation, have been watching for negotiations between the U.S. and its global trading partners to potentially lead to smaller levies. After the White House upset the order of global trade with the April 2 tariffs, China retaliated, escalating tension between the world's two largest economies.

The market is "processing historically unique developments" amid "great uncertainty," Powell said at the Chicago event. "I think you'll probably see continued volatility."

Exchange-traded funds that invest in corporate bonds have struggled this month, including investment-grade and high-yield debt. High-yield bonds are riskier, sometimes referred to as "junk" because of their below-investment-grade ratings.

The SPDR Bloomberg High Yield Bond ETF, which tracks an index of U.S. high corporate bonds and trades under the ticker symbol JNK, has lost around 1.6% since April 2 despite its rebound this week, according to FactSet data. That left the fund JNK down 0.2% so far this year on a total return basis.

In the wake of April 2, credit spreads, or the compensation that corporate bond investors receive over comparable Treasurys, widened at the same time that Treasury yields backed up.

That "usually doesn't happen when you have a big selloff in corporate bonds," said Chris Alwine, global head of credit at Vanguard, in a phone interview. In a "risk off" environment, he said that Treasury yields and credit spreads typically have a "negative correlation."

That's because investors tend to pile into Treasurys as a haven in times of market turmoil, sending yields of the U.S. government lower. And credit spreads typically widen when investors are shunning riskier corporate debt in favor of safer Treasury bonds.

Credit spreads jumped after April 2, although they have recently retreated somewhat since then, particularly after Trump announced on April 9 a pause on most "reciprocal" tariffs. Last week the yield on the 10-year Treasury note saw its biggest weekly climb since 2001.

The 10-year Treasury yield BX:TMUBMUSD10Y has declined since the end of last week, ending Thursday at 4.325%, according to Dow Jones Market Data.

The rise in long-term Treasury yields, at a time when riskier assets were under pressure on tariff fears, has had investors looking for potential drivers of the bond-market move.

Read: What the recent rise in 'real' Treasury bond yields signals amid tariff worries

While there was some concern that foreign holders of U.S. Treasurys were possibly selling them amid uncertainty surrounding the global trade war, hedge funds unwinding leveraged trades also emerged as an explanation for the climb in yields.

More: Foreign investors bought more Treasury bonds in February, official data shows

It can be "very hard to know in real time" what's behind significant moves in the bond market, according to Powell. "It's very premature to say exactly what's going on," he said Wednesday in Chicago, but acknowledged "some de-levering going on" among hedge funds with respect to their trade positioning in the bond market.

He described markets as "orderly" and functioning "kind of as you would expect them to in this time of high uncertainty."

The iShares Core U.S. Aggregate Bond ETF AGG, which provides broad exposure to the U.S. investment-grade market, including Treasurys, corporate debt and mortgages, has lost 1% from April 2 through Thursday, according to FactSet data. Year to date, though, the bond fund is up 2% on a total return basis.

Funds that hold long-term Treasurys have been battered since April 2, with the Vanguard Long-Term Treasury ETF VGLT slumping around 3.8% through Thursday, according to FactSet data.

Investment-grade corporate bonds have also been hurt amid the recent tariffs worries.

For example, the iShares iBoxx $ Investment Grade Corporate Bond ETF LQD has fallen 2% since April 2, according to FactSet data. But the fund has remained up in 2025 despite the recent carnage in the bond market, posting a year-to-date total return of 1%.

Should economic growth slow this year, Vanguard's Alwine expects that high-yield bonds risk underperforming investment-grade credit.

"We have been cautious on high-yield" on worries over "valuation," he said, explaining that junk-bond spreads were historically "tight" earlier this year. That sense of caution was not driven by concerns over "fundamentals," as corporate and consumer balance sheets generally appeared healthy coming into this year, he added.

Powell did not appear in any rush Wednesday to start lowering rates on worries over a slowing economy, saying in his prepared remarks that the Fed was "well positioned to wait for greater clarity before considering any adjustments to our policy stance."

During his discussion, he said the labor market was still "strong." The Fed's dual mandate is maximum employment and price stability, with inflation currently stuck above the Fed's 2% target after significantly easing from its 2022 high.

Powell pointed to the White House administration implementing "significant policy changes," particularly now around trade, saying the effects are "likely to move us away from our goals."

Meanwhile, the Fed is waiting to see where White House policies ultimately land in order to have "a better sense of the implications for the economy" and monetary policy, according to Powell's prepared remarks.

"Tariffs are highly likely to generate at least a temporary rise in inflation," he said.

"The inflationary effects could also be more persistent," Powell added. "Avoiding that outcome will depend on the size of the effects, on how long it takes for them to pass through fully to prices, and, ultimately, on keeping longer-term inflation expectations well-anchored."

-Christine Idzelis

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April 17, 2025 17:51 ET (21:51 GMT)

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