Treasury yields usually fall when stock markets are diving. But not this time. Why?
U.S. Treasury yields have surged in recent days amid the global market sell-off sparked by President Donald Trump’s tariff plans.
Does that mean Treasuries are now a more attractive investment?
Not necessarily. While higher yields are generally good for investors, it’s important to understand why those yields have jumped suddenly.
And in this case, there are big concerns you should be aware of before you jump into Treasury bonds or a Treasury bond fund.
Image source: Getty Images.
What makes Treasury bond rates rise suddenly?
Yields on Treasury bonds (and other bonds) are inversely related to the bond’s price. As prices fall, yields rise — and vice versa.
To understand why, let’s imagine a Treasury with a face value of $1,000 and a yield of 4%. At that yield, the Treasury pays $40 of interest per year.
Now imagine that the price of that Treasury in the secondary market falls to $925. It still pays $40 per year, but now the yield has risen to 4.3%.
Why would the price of a Treasury fall in the secondary market? For the same reason a stock’s price might fall: Supply is greater than demand. Or put another way, investors are selling.
It isn’t normal for Treasury yields to rise when stocks are plummeting
The rising yields are notable because they’re not what we would expect to see at a moment when stocks are selling off sharply.
Generally, in times of market turmoil, Treasury yields fall as investors looking for a safe harbor bid prices up. That’s because historically, U.S. Treasuries have been considered among the safest investments in the world — a safe place to park when stocks are being sold off.
But not this time. This time, stock prices are falling but Treasury yields are rising.
Why?
As I write this on Wednesday, it isn’t yet clear. Some analysts have suggested that hedge funds that own stocks on margin may be selling Treasuries (rather than stocks) to meet margin calls as those stock prices fall. Others have theorized that with so much uncertainty around the Trump administration’s tariff plans, investors may simply want to be in cash.
But there’s another possibility that’s far more worrisome for U.S. investors: Treasuries could be on the verge of becoming a weapon in a global trade war.
Are other countries weaponizing Treasuries amid Trump’s trade war?
Consider that the largest holders of U.S. Treasuries are the governments of Japan, China, and the United Kingdom. These are countries that the Trump administration has targeted with some of its highest tariff rates.
It’s possible that one of those countries (or more) has already started selling down its holdings of U.S. Treasuries. It’s also possible that investors fearing such moves could be fleeing all dollar-denominated investments, including Treasuries.
Either way, the traditional notion of Treasuries as the safest harbor in a market storm doesn’t seem to be holding true in this Trump tariff hurricane; at least, not yet.
What does this mean for you?
If those governments get serious about unloading Treasuries, or if large investors get serious about moving out of U.S.-dollar-denominated investments — or both — then Treasury prices will almost certainly fall a lot further from here.
This shouldn’t have much effect on you if you hold your Treasuries to maturity. But if you find yourself needing to sell early and the underlying price has fallen, you’ll lose money, just as you would with a stock.
And any mutual fund or exchange-traded fund focused on Treasuries could also lose value, because they’re exposed to falling prices too.
We think of Treasuries as a safe harbor in times of market uncertainty, but right now, there’s a lot of uncertainty around Treasuries themselves. Invest carefully.