Key Takeaways
• Bond yields jumped after the tariff announcement, and they have held most of those increases.
• The rise is unusual, in that it comes as expectations of a recession have grown.
• Fund managers say it’s still unclear whether the rise is temporary, and that it depends on the underlying causes.
The jump in US Treasury yields in the days after President Donald Trump unveiled his harsher-than-expected global tariff regime drew widespread attention, including from Trump himself. While yields have fallen somewhat since then, investors are left with the question of whether the spike was a one-off or a worrisome preview of things to come.
Fund managers say this depends on whether the primary causes prove to be temporary technical forces (such as short-term traders being forced to sell bonds to raise cash) or macroeconomic forces (such as the inflationary impact of tariffs or rising government deficits). The other potentially significant issue would be a fundamental change in how global investors view the safety of investing in US government bonds.
The Jump in Bond Yields
Normally, when the stock market tumbles or otherwise sees stress, investors seek the safety of US Treasuries, sending yields down as bond prices rise with increased demand. The stock market began to tumble after President Trump unleashed a series of tariffs on April 2. The Morningstar US Market Index fell as much as 14% by April 7; it has since recovered to be down 6%.
The 10-year Treasury yield initially followed stocks downward. However, on April 4, it began to rise, spiking from 3.99% to 4.49% over the following week. Yields have fallen somewhat since then, and are currently sitting at 4.42%.
While Trump had talked about raising tariffs for some time, “It was the widespread degree and magnitude [of the tariffs] that was a surprise,” says John F. Flahive, head of fixed income at BNY Wealth. The abrupt nature of the tariff’s implementation magnifies their potential damage to the economy by increasing uncertainty. “When you’re a CEO and you’re trying to deal with capital planning, you’re going to put things on pause,” explains Flahive. He adds that consumers may also pause spending, and these two factors may result in significant economic damage even before the tariffs themselves are taken into account.
The economic damage and increased recession risk is important to the bond market, as demand for Treasuries typically rises amid investor fear, lowering yields.
Explanation 1: Traders Unwinding
Priya Misra, portfolio manager for the $23 billion JPMorgan Core Plus Bond Fund HLIPX, argues that the primary factor behind the rise in yields is investors deleveraging their portfolios in the face of rising volatility.
The Cboe Volatility Index, also called the VIX, is a measure of volatility in the US stock market. At the beginning of April, the VIX was at about 22, and it then nearly tripled to just over 60 by April 7. Misra says that volatility raises margin requirements for traders, prompting them to sell assets for cash (often Treasuries, because of their high liquidity) to meet those requirements.
“It’s called a VAR [value at risk] shock,” says Misra. Value at risk is a measure of how much a trade can lose over a specific period. The market’s increased volatility made trades riskier. This means Treasury-based derivatives trades—for example, those that exploit the difference in yield between Treasuries and European bonds—became riskier. So many investors who made these investments when they were less risky sold Treasuries as they exited those trades. This caused the supply of Treasuries to rise, causing prices to fall and yields to rise.
This describes a temporary increase in rates based on a temporary jump in supply from selling. If that was the major reason for the spike in yields, then Treasury yields may not be pushed higher over the longer term. Yields had been falling for most of the first quarter of 2025, and Misra believes this is likely to continue, but mentions that other temporary technical shocks could cause volatility. “We think yields should go down,” she says. “We’re actually leaning into that,” albeit with “small conviction,” due to the high uncertainty and volatility.
Misra says expects rates to trend lower as the economy slows due to uncertainty over trade policy and the effects of tariffs. JPMorgan puts the chance of a recession by the end of 2025 at 60%, about four times the 50-year average and double what it was at the end of 2024. A recession also may prompt the Federal Reserve to lower rates, further boosting Treasury prices and cutting yields.
According to Misra, the main threat to falling rates is a major expansion of fiscal policy. “The way [the budget resolution] passed through the House was through verbal commitments of $1.5 trillion in spending cuts, so I’m not seeing massive deficit-financed tax cuts here,” she says. “If that comes about, then yes, there’ll be a fundamental reason for higher rates.”
Explanation 2: Higher Deficit Fears
Rob Waldner, chief fixed income strategist and head of macro research at Invesco, is less convinced that Congress will keep deficits under control. He believes that fear of rising deficits is the primary factor behind the rise in rates. “Larger deficits will require higher real yields,” he says. This is because deficits would increase the supply of Treasuries, pushing down prices if demand doesn’t increase as well. Bond yields move in the opposite direction of prices.
Waldner cites two main reasons he expects the debt to increase. First, “We’ve increased the probability of recession due to the tariff issue,” and a recession would cut tax receipts and raise spending as the government provides stimulus. He also expects spending to rise irrespective of a recession. “There’s a number of things going on in Congress that make it seem like we may get more tax cuts.” Waldner points to Trump’s proposal to eliminate taxes on tips and make auto loans tax-deductible, as well as extending his 2017 tax cuts.
“All of that may mean that there are more tax cuts than we originally expected, and that would further drive the deficit a little bit higher,” says Waldner. “So you have a situation where I think the market is going increasingly concerned that the budget deficits are already high and will grow higher because you get a recession and you get more tax cuts, and that will lead to more issuance.”
Explanation 3: Inflation Fears
Flahive says fears of rising inflation, particularly over the next few years, is a main reason for the spike in bond yields. Bonds with a set rate of interest become less valuable if inflation rises because they are worth less in inflation-adjusted terms. Tariffs raise the price of goods, and Flahive says that there’s a concern that they will inevitably increase inflationary pressure on the economy.
Flahive cites how the two-year breakeven inflation rate (where Treasuries and Treasury inflation-protected securities have the same real yield) rose from 2.54% at the end of 2024 to 3.36% on April 8. The fact that five-year and 10-year breakeven rates stayed relatively steady or fell indicates inflation worries may be focused over the next couple of years, as Flahive doesn’t believe tariffs will prompt inflation to spiral ever higher.
A Potential Wildcard: Falling Foreign Demand
Nearly a third of US Treasuries (excluding those held by the US government itself) are held by investors outside the United States—roughly $8.5 trillion worth. A substantial decline in demand from non-US buyers would significantly lower bond prices.
The concern comes from a couple of avenues. The first is that other governments will retaliate against US tariffs by selling (or just not purchasing) US Treasuries. While there is no evidence that foreign buyers are dumping US Treasuries, Waldner says clients at Invesco are worried about the possibility. Flahive characterized the market as being “particularly fearful of lack of demand from foreign trading partners.”
The second is tied to President Trump’s goal of eliminating US trade deficits. The large foreign demand for Treasuries comes from the dollars used to buy foreign goods, which investors around the world turn around and invest in Treasuries. “If the endgame with the tariffs is that the trade deficit with China is going to be zero, China has no reason to own $800 billion of Treasuries,” says Misra. “And if you do this with the rest of the world, the entire foreign demand for Treasuries goes away.”
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar's editorial policies.
