April was a month to remember due to the Trump Administration’s trade war declaration on “Liberation Day,” followed by a rapid backtrack. Higher-than-expected tariffs announced on April 3rd resulted in the S&P 500 trading down 12% for the remainder of that week. At one point, it was down 19% year-to-date.
Early the following week (Monday, April 7th), the benchmark U.S. 10-year bond yield spiked to 4.2%, a 0.2% increase from the previous close. Bond yields move inversely to prices, and this sharp move prompted various theories, including leveraged hedge fund selling, foreign central bank selling, or even China selling.
Subsequently, and possibly relatedly, the Trump Administration announced a 90-day pause on the reciprocal tariffs announced on Liberation Day. This prompted a 9.5% rally in the S&P 500, even as tariffs on China were increased at the time.
Most recently, prior to the market open on Monday, May 12th, the U.S. and China agreed to a 90-day mutual reduction in tariffs to more reasonable levels, resulting in a one-day gain of 3.3% in the S&P 500. At the time of writing, both the S&P 500 and the Canadian bond universe are slightly positive for the year, with under-1% gains.
In summary: lots of news and volatility this year to date, but not a lot of movement.
A Changing U.S. Economic Outlook
The U.S. economic outlook has weakened this year. The consensus forecast for 2025 GDP has been revised lower to 1.4% post-Liberation Day, down from over 2.0% in January. Forecasting the U.S. economy is difficult at the best of times, and current economic models must now incorporate the shifting dynamics of the trade war, with incremental news often coming daily.
Despite this, we believe the U.S. economy will be more resilient than during post-turn-of-the-century downturns. Key factors include:
- Residual liquidity from above-trend money supply growth during the pandemic.
- Consumer balance sheet strength (notably in home equity.)
- The relatively closed nature of the U.S. economy compared with major trading partners.
The terms “hard data” and “soft data” have become widespread, from boardrooms to taxi cabs. It reflects a growing disparity: backward-looking U.S. economic statistics have remained stable, while forward-looking sentiment indices have weakened due to trade war concerns.
A Bear Market in Bonds?
Despite volatility and downward growth revisions, one notable development has been the stickiness of long-term interest rates. As of this writing, the U.S. 10-year Treasury yield – arguably the most important interest rate globally – sits at 4.53%, virtually unchanged from the start of the year. This, even as the 2025 GDP outlook has been downgraded by almost a full percentage point, with increasing recession odds.
Anecdotally, there's growing discussion around the U.S. budget deficit and the effect of an associated $2 trillion in new annual bond supply on the Treasury market. For context: the U.S. Treasury market is now around $30 trillion in size. Before the global pandemic, large U.S. government deficits were often financed via quantitative easing (QE) and foreign central bank buying. Today, with inflation above the Fed’s target and a U.S.-led trade war in progress, those sources of demand are absent.
We believe that traditional bonds entered a bear market during the pandemic, one that could persist for a generation. This is due to substantial government budget deficits and the outsized supply of new Treasury bonds.
For the past five years, the cumulative return in Canadian and U.S. bonds is negative. Going forward, we believe it’s vital for long-term savers and investors to think beyond the traditional 60/40 portfolio, which has historically embedded a high degree of interest rate risk.
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— Sandy Liang, CFA, is the Head of Fixed Income at Purpose Investment Partners
The information in this article draws on is provided by Bloomberg unless otherwise stated.
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