Stick with Shorter-Term Bonds, but Growth Concerns Linger
President Trump’s trade-war tactics continue to challenge investors, as stock market fluctuations highlight uncertainty, alongside mixed signals from the bond market.
On Tuesday, yields on 2-year Treasurys hovered near 4.21%, just below their 200-day moving average, according to FactSet data. Meanwhile, 10-year yields were closer to 4.51%, significantly above their average over the same period.
Monitoring yield trends over time provides valuable insights, yet both short- and long-term yields remain elevated compared to late August—when Federal Reserve Chair Jerome Powell signaled an impending shift toward rate cuts. This trend persists despite Wall Street’s prior warnings to lock in yields before anticipated rate reductions. The Fed has since lowered its short-term policy rate by 1 percentage point since September.
“There are two narratives the bond market is grappling with,” said Lawrence Gillum, chief income strategist at LPL Research, in a phone interview on Tuesday.
Yields on short-term Treasurys reflect inflation concerns and the Fed’s cautious stance on rate cuts, Gillum noted. Another key factor is tariffs—while they push prices higher, they also dampen economic growth. Gillum expects Trump’s tariffs to exert downward pressure on 10-year yields, likely bringing them into the low 4% range later this year as investors react to slowing growth.
How Should Investors Position Themselves?
For fixed-income investors, Gillum suggests maintaining a focus on shorter-duration bonds. “The biggest ‘bang for your buck’ in terms of yield per duration is in the short end of the Bloomberg Corporate Index,” he said.
A look at different bond maturity segments within the index helps gauge how a portfolio might respond to interest rate shifts over time. “Right now, the economy is in good shape, but it probably won’t be toward the end of the year,” Gillum told MarketWatch. For those managing a fixed-income portfolio relative to an industry index and aiming to outperform, he advises staying neutral and avoiding excessive rate risk until economic data weakens.
“There’s still a lot of value in the front-end,” Gillum added, noting that shorter-duration bonds continue to offer yields around 4.5%—higher than most of the past decade.
Trump’s unpredictable tariff policies introduce additional risks. BofA analysts estimate that the S&P 500 could suffer an 8% hit to earnings per share if 25% tariffs on Mexico and China, along with incremental 10% tariffs on China, take effect.
While concerns over equity market volatility bolster the case for bond holdings, investors also risk waiting too long for aggressive Fed rate cuts amid economic downturns.
“The big takeaway,” Gillum emphasized, “is that volatility in fixed-income markets isn’t going away.”
On Tuesday, the S&P 500 climbed 0.8%, while the Dow Jones Industrial Average gained 0.4% and the Nasdaq Composite rose 1.2%, according to FactSet data.
