US Stock Market Slumps and Bonds Surprisingly Follow

On April 2, 2025 dubbed 'Liberation Day’, the US imposed a host of tariffs including a 10% levy on all imported goods, with additional tariffs targeting specific countries: 34% on Chinese imports and 20% on goods from the European Union.

As a rection, the markets didn’t just flinch; they full-on panicked. The Dow Jones Industrial Average plunged over 1,600 points, and the S&P 500 and Nasdaq took their biggest gut punches since the dark days of the COVID-19 pandemic.

Now, here’s the part no one saw coming. Normally, when stocks nosedive, investors seek refuge in bonds, which typically gain value as interest rates fall. But not this time! Bonds, too, decided they’d had enough and tumbled alongside stocks, sending yields sky-high and investors scrambling for answers. Let’s dig into this financial rollercoaster.

Why are Treasury Bonds Crucial for The US Administration?

US Treasury bonds are among the safest investments globally. They have the backing of the US government’s ‘full faith and credit.’ Due to their reliability and the US dollar’s status as the global reserve currency, they attract foreign governments, central banks, and private investors. These investments help the US government fund public programmes, infrastructure, and defence while stabilising global financial systems.

A decline in bond worth poses significant challenges. When bond prices fall, yields increase, raising government borrowing costs. This can lead to higher interest payments, diverting funds from essential programs. Additionally, reduced confidence in US bonds may impact their demand, weakening the dollar’s position as the global reserve currency. Such scenarios can ripple through the economy, affecting corporate borrowing costs and investor sentiment.

Key Reasons Behind the Bond Market Fall

Here are the most common reasons why bond prices are falling in the US market.

• Rising Interest Rates

The Federal Reserve’s recent interest rate hikes have had a major effect on the bond market. For example, the 10-year US Treasury yield during April’s first week surged to 4.77%, marking a 14-month high. The increase reflects the inverse relationship between bond prices and interest rates, also called yields. Newly issued bonds become more attractive with higher interest rates, whereas older bonds with lower yields lose value.

• Inflationary Pressures

Inflation remains a pressing concern. The annual rate, which is approaching 3% in early 2025, diverges from the Federal Reserve’s 2% target. Contributing to this inflationary trend are the extensive tariffs imposed by the US administration, including a 104% duty on Chinese imports and a 20% tariff on goods from the EU. These tariffs have raised the average US tariff rate to 22%, the highest since 1910, leading to increased consumer prices and further complicating inflation.

• Geopolitical and Economic Uncertainty

Geopolitical tensions, particularly the escalating Israel-Hamas conflict, have heightened global economic uncertainty. Such instability often leads investors to reassess risk, resulting in capital outflows from both equities and bonds. The unpredictability of these events makes it challenging for investors to find safe havens, leading to widespread market volatility.

• Fiscal Policy and Government Debt

The US government’s fiscal policies have led to a growing national debt, surpassing $36 trillion as of 2025. With nearly $3 trillion of US debt maturing this year, much of it short-term, the Treasury faces the challenge of rolling over this debt amidst an almost $2 trillion budget deficit. The increased supply of Treasury securities has driven yields higher, diminishing bond prices and eroding investor confidence in the government’s fiscal management.

• Foreign Investor Behaviour

Foreign investors, who have historically been significant purchasers of US Treasuries, are reevaluating their positions. Concerns about the US fiscal outlook and the potential for currency depreciation have led to reduced demand from countries like China and Japan. This decline in foreign investment further exacerbates the challenges facing the US bond market.

• Market Dynamics and Speculation

The synchronised decline in both stocks and bonds has disrupted traditional investment strategies, such as the 60/40 portfolio split. Investors are looking for alternative assets, such as commodities and real estate, to hedge against market volatility. This shift in investment behaviour reflects a broader reassessment of risk and return in the current economic environment.

Investor Sentiments and Safe Haven

In times of financial stress, investors typically flee risky assets and seek shelter in something considered a safe haven. However, the current downturn has thrown even this situation into chaos. With both stocks and bonds declining in tandem, the usual havens are no longer acting predictably.

Gold Prices: Gold, however, remains a classic fallback. The precious metal rallied past $2,400 an ounce on 11 April 2025, its highest level in over two years, as fear gripped the markets. The surge reflects growing concerns about currency devaluation, inflation and geopolitical instability, all of which increased gold’s appeal as a store of value.

Cash: Cash has made a comeback, too. Money market funds and high-yield savings accounts are seeing inflows, with many investors choosing liquidity over long-term bets. With yields rising, even short-term treasury bills, despite the broader bond slump, are attracting cautious investors looking for lower-duration exposure.

Conclusion

In April 2025, both US stocks and bonds declined simultaneously. Multiple factors contributed to this downturn, including rising interest rates, persistent inflation, global conflicts, government financial challenges, shifts in foreign investment and speculative market behaviour. However, investors are now parking their capital in a more fragmented and diversified mix of assets, highlighting a broader shift in risk appetite and investment strategy. With investors facing a tricky situation, potential trade talks with various nations remain the only ray of hope for investors in the US market.

Source: The Economic Times, Investopedia, Reuters