Tariffs have rocked US government bonds – are they still safe?

Hannah Williford

When equity markets experience turbulence, people have historically held tight to their bonds in the hope they provide a cushion for portfolios.

Even though some value may be lost on equities, the value of bonds would often go up, offsetting some of the losses. But earlier this month, both shares and bonds sold off together. The yield on a 10-year US government bond – known as a Treasury – jumped from 4% to 4.5% in a week as the price of bonds dropped, according to data from MarketWatch.

US President Donald Trump has now put a 90-day pause on certain tariff policies, which brought some calm to financial markets and resulted in Treasury yields easing back to circa 4.4%. But the reaction of bonds immediately after the original Liberation Day tariff announcement has caused some worry by not acting as a balance for equity market falls.

How do bonds work?

Governments issue bonds as a way of borrowing money. They agree to pay a fixed rate of interest over a specific period, such as 10 years. At maturity, the government pays back the issue price of the bond. Corporate bonds work in the same way; except they are issued by companies and not governments.

The price of a bond can go up or down after it is first issued, based on market demand. If a bond price falls, its yield will go up. When bond prices rise, yields fall.

Therefore, when you hear about bond yields rallying – as we’ve just seen with US Treasuries – it means that the price of these bonds is falling.

Why are US Treasuries considered ‘safe’?

US Treasuries have historically been considered a lower-risk investment and relatively safe compared to stocks and shares because they are backed by the US government. Most people believe the government won’t default on repaying the money, so Treasuries are viewed as lower-risk investments.

What’s caused investors to sell US Treasuries?

Donald Trump’s tariff plan threatens to backfire as it could push up inflation in the US and make the cost of living and doing business more expensive for companies and consumers.

The risk of a recession has gone up, which means investors are demanding a greater return for investing in the US. In effect, they want a higher yield on US Treasuries as compensation, hence why bond prices have fallen, and yields have risen.

There are also concerns that China will sell some of its $760 billion worth of US government bond holdings as relationships between the two countries deteriorate. Selling by such a significant investor in US Treasuries could have a pronounced impact on the price of the bonds.

Do bonds still provide a good diversifier?

In the early 2000s, bonds in general held a negative correlation to equities. For example, when equity prices went down, bond prices typically went up. Until 2022, this correlation, for the most part, stayed true.

When equity markets fell in 2022, inflation rose and that created a headwind for bonds. Central banks fight higher inflation by raising interest rates – and that in turn influences bond yields. In this environment, newly issued bonds offer higher yields than existing ones and that makes the latter less attractive and pulls down their price.

In 2022, instead of equities and bonds moving against each other, they started moving in tandem. That relationship started to break down last year when we saw the beginning of an interest rate cut cycle in many parts of the world. Unfortunately, the Liberation Day tariff plan has upset markets once again and caused bonds to behave in an unusual way.

While bond and equity markets are not completely in sync, they are not moving in the opposite way that we have come to rely on for returns in the past decade. This might only be a temporary phenomenon and investors should not panic because of what’s happened over the past few weeks.

These articles are for information purposes only and are not a personal recommendation or advice. Past performance is not a guide to future performance and some investments need to be held for the long term. Forecasts aren't a reliable guide to future performance.

Written by:
Hannah Williford
Content Writer

Hannah joined AJ Bell in 2025 as an investment writer. She was previously a journalist at Portfolio Adviser Magazine, reporting on multi-asset, fixed income and equity funds, as well as macroeconomic impacts and regulatory changes within the industry.

Hannah earned a degree in journalism from the University of Texas at Austin before beginning her career in London. Before joining the finance industry, she covered state politics in Texas and worked as a sports reporter.

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