Bond yields are supposed to fall when stocks tank. But last week, the market flipped that logic on its head — again — sparking renewed concern that the bond market isn’t functioning like it should.
What’s happening: When President Trump announced sweeping tariffs on April 2nd, the S&P 500 plunged 10.5% by week’s end. True to form, investors flocked to Treasuries, pushing the 10-year yield below 4.0% — its lowest level since October. That’s how the system is supposed to work. But then something changed.
Yields Rose: As stocks bounced — the S&P rebounded 7.6% last week but remained 5.4% below pre-tariff levels — bond yields soared. While this was expected, it was the amount of the climb that was troubling. The 10-year yield shot up to 4.49%, erasing the tariff-induced rally and then some.
- A 50 basis point swing in a matter of days, especially without a strong equity rebound, raised eyebrows: Is the bond market broken?
The short answer: No. But it’s under stress.
Why it matters: The U.S. bond market is a global anchor. When its normal relationships break down — like stocks and bonds falling together — it raises red flags about liquidity, demand, and financial stability.
So what is happening? As is often the case in financial markets, there wasn’t a single culprit behind the selloff. So, who was offloading bonds last week? The answer: Japan and hedge funds.
- Japan, not China, sold bonds. When the administration cited the bond market as a reason to pause tariffs (except on China), some speculated that China had retaliated by dumping Treasuries. But data suggests it was actually Japan — the largest foreign holder of U.S. debt — behind the selloff. That alone can tip the scales, especially in a fragile market.
- Hedge funds unwound the “basis trade.” This popular trade — borrowing to buy Treasuries while shorting futures — works well in calm markets. But in volatile times, it quickly becomes unstable. Last week’s turbulence forced hedge funds to unwind their positions, flooding the market with Treasuries and driving prices down, yields up.
The big picture: Foreign buyers hold roughly $9 trillion of U.S. debt — about 25% of America’s $36 trillion total. If confidence in Treasuries erodes globally, that selling pressure could overwhelm domestic demand, pushing rates higher regardless of U.S. economic conditions and force the fed to act.
Bottom line: The bond market isn’t broken — yet. But it’s showing signs of stress. As America has benefited more from foreign capital, keeping global buyers confident in Treasuries is essential to avoid rate shocks that could ripple through housing, credit, and growth.