It’s one of the most reliable relationships in the investing world: When investors are spooked and stocks fall, Treasury bonds often gain ground.
The reasons are twofold: First, many investors have historically viewed US Treasuries as the ultimate port in a storm, because the US government has taxing authority over some of the richest companies and citizens in the world. Second, if the stock market downdraft is borne out of unease over the health of the economy, investors expect the Federal Reserve to accommodate with interest-rate cuts, pushing up bond prices. Those two factors help explain why high-quality bonds, especially Treasuries, have been reliable ballast for stocks during recessions.
But during the recent round of tariff announcements, a troubling development came into focus as stocks tumbled: Treasury bond yields actually rose during the period, meaning that their prices fell.
That blip in Treasury bond performance follows on the heels of 2022, when stocks and bonds also fell simultaneously amid high inflation and a series of Fed interest-rate hikes. The question is, are bonds less reliable as diversifiers for stocks than they once were? Should investors look elsewhere instead? In short, no and not really. But the recent volatility is a reminder that investors should augment any bond holdings with cash for near-term expenditures, and also mind the type of bonds they own.
What Happened?
Ten-year Treasury bonds were yielding about 4% prior to the tariff announcements on April 2. Yields initially declined after the tariff announcement, but they had jumped to 4.5% by April 11. They’ve since settled back down to about 4.3%.
Those rising yields cause bond prices to drop for the simple reason that investors would prefer newer bonds with higher yields to the already-existing bonds with lower yields attached to them. Intermediate-term Treasury bond prices dropped 2% from April 3 through 11, while long-term Treasuries fell by more than 5% over that stretch.
Market watchers have offered numerous explanations for why Treasury yields rose when one might have expected them to decline. Some have posited that tariffs diminished global investors’ appetites for all US assets, both stocks and bonds; both the Chinese and Japanese governments have been selling Treasuries thus far this year. Inflationary concerns are also in the mix: Even though worries over a recession have increased in recent weeks, investors are also concerned that tariffs could boost the prices of everything from shoes to cars to houses. That could prompt interest-rate hikes to stave off further inflation.
Bonds Have (Mostly) Delivered
To be sure, Treasuries’ recent swoon is unsettling, and it’s not a given that it will be smooth sailing for them—and for bonds in general—if tariffs take fuller effect in the months ahead. Market participants seem to be signaling an unease with US trade policy, and those concerns haven’t gone away.
But while losses from the safe portion of investors’ portfolios are never welcome when their stocks are dropping, they’re not unprecedented. For example, Treasury prices also sputtered during the early part of the covid-19 pandemic before regaining their footing.
It’s also important to note that Treasury bonds lost substantially less than stocks when trade-war worries were peaking earlier this month. While Treasury losses were in the low single digits over that same stretch of maximum tariff uncertainty from April 3 through 11, for example, the Morningstar US Market Index lost 8% over that stretch. Stock and bond losses were directionally the same, but the magnitude of those losses was quite different.
In addition, bonds have actually performed reasonably well since the recent bout of market volatility started to flare up, which dates back to late February 2025. The Morningstar US Market Index has lost nearly 13% since the current bout of turbulence began on Feb. 19 through April 15. Meanwhile, long- and intermediate-term Treasuries have posted small gains over that period.
Part of bonds’ salvation during this period has been their higher yields, which provide a cushion against losses in bond prices. That’s a notable change from 2022’s grinding series of interest-rate hikes, when skimpy bond yields provided little to no cover against bond-price declines. The 10-year Treasury yield stood at 1.76% at the beginning of that year; by year-end, it had more than doubled. The fact that yields are even higher today provides more cover for bond prices should they fall.
Hold Cash, Watch Credit Quality and Duration
Of course, it’s too soon to say whether the recent bobble in Treasury prices was a short-term blip or the beginning of something more lasting and more concerning. But investors can take away a few lessons from the recent market action.
One is the value of holding cash as a source of liquid reserves rather than relying on bonds, even high-quality ones, in a crunch. In our 2024 research paper on correlations and diversification (2025 version coming soon!), we found that Treasury bills exhibited the lowest correlation with the US stock market over the past three years, whereas bonds’ correlation with stocks had generally risen. (The year 2022, when both stocks and bonds posted losses due to rising rates, was the culprit.) Bonds will likely diversify stock exposure over time, as they’ve always done, but they’re not foolproof over short time periods.
Another is that individual bonds, rather than funds or exchange-traded funds, can help investors meet specific funding obligations without having to worry about short-term bond market volatility. Defined-maturity, or bond ladder, funds can also be a reasonable alternative, offering both the diversification of a fund and the certainty of holding a high-quality individual bond to maturity. For minimalists, a combination of cash and short- and intermediate-term high-quality bond funds, with allocations calibrated to an anticipated spending horizon, can achieve similar aims.
Finally, the recent volatility is a wake-up call to check the complexion of your fixed-income exposure, both its interest-rate sensitivity and credit quality. While their higher income streams might appeal to yield-centric investors, both longer-term and lower-quality bonds performed poorly during the recent round of equity market volatility. They can play a role around the margins of a broadly diversified portfolio, but their volatility will tend to make them more equitylike than bondlike. For core fixed-income exposure, high-quality short-term bond funds and intermediate-term funds in Morningstar’s core and core-plus categories will offer the best antidote to equities. Additionally, people who are actively spending from their portfolios should consider a complement of inflation-protected bonds—Treasury Inflation-Protected Securities and I bonds—to help protect their purchasing power.