US stocks tumbled following President Donald Trump's announcement last week of widespread retaliatory tariffs and a 10% universal import tax, triggering fears of rising consumer prices and a potential recession. But it was surging bond yields, not plunging stocks, that got the White House's attention.
Shortly after pausing the "reciprocal tariffs" that went into effect on Wednesday, Trump said he'd been watching the bond market closely and he acknowledged that "people were getting a little queasy." A wave of selling began hitting US Treasury bonds Tuesday night as the prospect of sweeping tariffs fueled concerns about the reliability of US-backed assets.
Despite Trump's pause, the Treasury selloff deepened Friday as investors continued their flight from US assets, propelling longer-dated yields toward their largest weekly jump since the 1980s.
Normally, during economic uncertainty or recession fears, investors tend to buy US Treasury bonds due to their stability and predictable returns. These are seen as a safe-haven because the US government is considered very likely to repay its debt. However, Trump's unpredictable trade agenda has caused significant turbulence in government debt markets, eroding confidence in the US economy and policy stability. This has fueled speculation that major foreign debt holders, such as China, might be retaliating by reducing their Treasury holdings, which would drive yields up higher.
There's also widespread fear that tariffs will stoke more inflation, which is bad for bonds, said Greg Sher, managing director at NFM Lending. If investors expect higher inflation, they demand higher yields to compensate for the reduced purchasing power of future bond payments.
A persistent increase in bond yields could result in elevated prices, higher borrowing costs and severely weakened economic growth, with a recession a distinct possibility.
So while Trump may have granted somewhat of a reprieve, the recent whipsaw in markets has consumers "dazed and confused," Sher said. "Right now, it's wait and see."
What do rising bond yields mean for your money?
Treasury yields are the benchmark for interest rates on mortgages, credit cards, car loans and more, meaning rising yields could translate to higher borrowing costs for everyday consumers.
Despite a fall in the average 30-year fixed mortgage rate (from 7.04% to 6.62% per Freddie Mac) since Trump assumed office, analysts warn that sustained increases in bond yields could reverse this trend.
On the flip side, higher yields offer better returns for those investing in money market funds or high-yield savings accounts.
However, uncertainty is still the word on both Wall Street and Main Street, with investors pondering an upheaval to the global economy and consumers unsure of how to best protect their savings and retirements.
It's important to remember that market responses don't necessarily portend what will happen down the road. Smart personal finance means avoiding knee-jerk reactions to news headlines. Instead, prepare yourself for market fluctuations and concentrate on the financial decisions you can control.
Here are four basic things experts say you can do to get ahead of a potential downturn:
- Build an emergency fund for a financial cushion.
- Keep your resume current in case of job loss.
- Prioritize paying down high-interest debt.
- Stick to your longterm investment strategy by avoiding any drastic changes.
