Bond Bear Market? Not So Fast. Why U.S. Confidence Isn’t Going Anywhere.

• Treasury volatility increased after Liberation Day, but we see opportunity as others panic

• Near-term hedge fund dynamics don’t change long-term realities

• We anticipate potential improvements in macro fundamentals over the next 12-18 months driven by policy changes, though outcomes remain uncertain

The U.S. is the cradle of capitalism. That’s a mantra we’ve detailed before, but in the context of economics, business investment, and equities. It applies to the bond market, too. We celebrated April 2, 2025, Liberation Day, despite all the doom-and-gloom calls for Smoot-Hawley 2.0, an incoming global depression, and even predictions of a Black Monday 1987 type of event in the stock market. 

In true Donald Trump style, he came out firing with a shock and awe proposal of extreme reciprocal tariff rates on countries worldwide. There have been adjustments to his opening salvo from the White House Rose Garden, and markets have obviously moved. 

But let’s home in on the bond market. A $57 trillion arena, Treasuries, municipals, and corporate credit often don’t swing as violently as stocks, but when recession fears increase and confidence gets shaken, steady interest rates quickly turn to sharp up and down moves. Those gyrations then impact equities, the U.S. dollar, commodities, real estate, cryptocurrencies, and everything in between.

Global Bond Market Perspective

Source: J.P. Morgan Asset Management

For President Trump and his team, Treasuries must remain the world’s risk-free securities. Though a modest U.S. recession likely wouldn’t change that reality, several factors have been at play driving up yields. So, let’s explore why long-term Treasuries have sold off lately and why it shouldn’t be cause for alarm. 

For context, when U.S. government bills, notes, and bonds are sold heavily, prices drop and interest rates rise. In fixed income, there’s generally a see-saw relationship between yield and price. Selloffs can happen for myriad reasons, including expected Fed rate hikes, inflation, or (on the good side) higher expected economic growth. Lower bond prices are not inherently bad—it depends on the reason for the downward move. 

As for the yield, it’s the annual expected return on a bond. When the price falls, the investor should receive a higher effective return, assuming no default risk and that they hold the bond to maturity. As a bond price is bid higher, its yield-to-maturity falls since the coupon payments are smaller compared to the current price. All the while, the par value (also known as the face value) doesn’t change.

Here’s a little more Fixed Income 101: short-term “bills” are generally those that come due within 12 months; intermediate “notes” mature between two and 10 years; and long-term “bonds” tend to have the most volatile price action, maturing 20-30 years out.

Interest rate changes are critically important for the macroeconomy. Short-term Treasuries give us clues about future Fed policy action, and the higher those rates get, the more it costs consumers and small businesses to borrow (conversely, bond investors generally like higher yields, so long as default risk is minimal). As for intermediate and long-term interest rates, those are more crucial to larger companies, as they tend to borrow with a longer duration. 

Regardless of maturity, shifts in the Treasury yield curve signal where the economy is headed. Investors in a 60/40 balanced portfolio often rely on an inverse relationship between the price of stocks and bonds.

We'll call on history to prove that bonds don’t always zig when stocks zag—it's all part of the normal intermarket correlation shifts over the decade. Moreover, higher starting yields today offer more of a cushion for risk-sensitive investors compared to, say, 2021, when the Federal Reserve was artificially suppressing interest rates. 

We’ll also frame bond market mechanics against Ray Dalio’s principles to widen the aperture further. The goal is to see beyond the dramatic and biased financial media’s sensationalism so you can invest with confidence in a dynamic macro portfolio that may weather any regime shift.

Understanding the Interest Rate Spike

“I used to think if there was reincarnation, I wanted to come back as the president or the pope or a .400 baseball hitter. But now I want to come back as the bond market. You can intimidate everyone.” - James Carville

Both monetary and fiscal policymakers often have their hands full when setting interest rate policy. For the Fed, when times are quiet, it’s a rather easy job: monitor growth trends, make modest bond sales or purchases, and occasionally adjust interest rates. Congress may seek to perform counter-cyclical activities, like stimulating the economy through tax cuts and increased spending amid slow-growth stretches, while raising taxes and tightening its purse strings during booms. That's the textbook assessment, at least.

Allio doesn't align with Democratic Party strategist James Carville on hardly anything, but he is one for folksy quips. His assertion that the bond market is a potential monster not to be reckoned with is apropos. The recent rise in long-term interest rates, even as the S&P 500 declined, renewed fears that confidence was fundamentally shaken. In April 2025’s first full trading week, the U.S. 10-year Treasury yield rose by the most since 2001, all while the “long bond” (the 30-year Treasury) approached the psychologically important 5% mark.

A Sharp Rise in the 10-Year Treasury Note

Source: Bloomberg

30-Year Treasury Bond Yield: 4%-5% Is Not Extreme

Source: Stockcharts.com

Treasury Bonds Don’t Always Hedge Stocks

Source: BofA Global Research

The ICE BofA MOVE Index (MOVE), which gauges volatility across the Treasury market, printed its highest weekly close since stocks’ bear market bottom in October 2022 ahead of Palm Sunday 2025. What made the price action particularly jarring was that it came after investors flocked to the perceived safety of U.S. Treasuries in the immediate response to the Rose Garden announcement. 

ICE BofA Move Index: Treasury Rate Volatility Elevated, But Not Historically Extraordinary

Source: TradingView

There are three potential catalysts:

1. Foreign Selling

The media makes it sound like other nations control our debt, but that’s far from the truth. Non-US investors own just 33% of the U.S. Treasury market—that's down materially from just 15 years ago. Financials, including large banks and pension funds, have an increased stake, and they are unlikely to dump holdings onto the market en masse. 

What’s more, as U.S. investors buy overseas products, that cash must be put to work somewhere. Foreign countries are unlikely to purchase financial assets with significant credit risk assigned to them. More importantly, the U.S. must maintain a healthy private sector and promote a functioning banking system. While international selling may be responsible for some of the rate rise across the intermediate and long Treasury curve, it should not be cause for panic.

During the early April 2025 market turmoil, the euro, yen, and other currencies rallied against the U.S. dollar. That may have prompted ex-US investors to repatriate their capital, which begat Treasury selling, pushing yields up. 

Who Owns the U.S. Treasury Market?

Source: BofA Global Research

2. Active Hedging and Forced Selling

We can probably pin the back-up in Treasury yields to mere market mechanics. An old Wall Street maxim says, “In a time of crisis, all correlations go to 1.” Was the stock market rout in April 2025 a panic? Well, it was borderline. In the initial sessions, the S&P 500 fell 19%. A steep retreat, certainly, but U.S. large caps have a history of falling by that precise percentage just to shake out the weak hands. 

S&P 500 Drawdowns of 19% Are Common

Source: Koyfin Charts

There’s no debate that times were volatile. The Cboe VIX Index (VIX) soared to above 60, a level only previously touched during the 2008 Great Financial Crisis and at the depths of the COVID-19 bear market (the August 2024 surge was due to mispricing of options that go into the VIX calculation). 

So, when volatility gets a jolt and stocks plunge, eventually, some offside hedge funds and high-risk strategies have to tap out and raise cash. They naturally sell equities, but they also may liquidate government bonds. When fixed income sells off, interest rates increase. As markets stabilize and confidence returns, particularly once macro conditions improve as Trump’s policies take root—the natural reversion trade would result in lower interest rates. 

Cboe Volatility Index: High, But Not Unprecedented Volatility in April 2025

Source: Stockcharts.com

3. Unwinding of the Basis Trade

The reason de jour for a fast move up in yields was the so-called unwinding of the basis trade. This gets into the weeds of hedge fund portfolio management, but can be an x-factor on the margin. The basis trade, where hedge funds exploit price differences between Treasury securities and Treasury futures contracts, has grown to almost $1 trillion in size. 

But what is the basis trade in practice? It’s an arbitrage strategy, and an example helps to figure it out. Suppose the 10-year Treasury note is priced to yield 4.50% in the cash market, while its futures price implies a yield of 4.45%. A bond trader might buy the “underpriced” Treasury note (the cash bond, in this case—recall that a higher yield means a lower price), financing the trade at a 3.5% rate based on the near-term repo market. At the same time, the lower-yielding futures note is sold. The trader earns the yield spread and can usually profit from price convergence between the cash and futures positions at the expiration of the futures contract. The risk is that prices don’t come together but diverge significantly, as we saw earlier this month. That can beget forced selling and a widening of the “basis.” Rising market yields, such as the repo rate, can cause further market dislocations. Finally, when many traders are in on the same trade, adverse Treasury price movements can lead to sharp price changes and interest rate moves.

We must acknowledge the denominators (a $50 trillion-plus U.S. bond market), but $1 trillion is still notable, especially when hedge funds are leveraged up to 100:1. These bets profit from price convergence as futures near expiry, but when cash and futures diverge, forced selling can come about.

The basis trade, in particular, warrants attention. Its scale and the leverage employed by high-risk strategies may cause unusual and extreme interest rate swings throughout a single trading session. Despite the Treasury market’s size, it can also be fragile at times, depending on ebbs and flows in macro variables; a selling cascade can ensue without warning. And with an expanding U.S. government debt balance, the basis trade has likewise grown. Finally, broker-dealers, who facilitate hedge fund trading, may turn strained when volatility rises in Treasury price action. 

The good news for investors is that these reasons are largely not systemic problems that point to a deterioration in the U.S. sovereign credit landscape. It’s more a function of what can happen when asset-class volatility increases and correlations approach 1. Also, the bond market may have been sending Congress, not President Trump, a message to get its fiscal house in order.

Basis Trade Unwind Catalyst: Leveraged Short Positions in Treasury Futures Have Risen Since 2022

Source: Bloomberg

Why Confidence in U.S. Treasuries Remains Justified

Can the bond market push around big players with little notice? Absolutely. Does that mean confidence is broken and stability will never return? No way. The U.S. Treasury space is the world's largest, most liquid, and most trusted fixed-income market. History reveals that volatility happens—even with safe-haven assets like government debt. President Trump understands it well, given his long history of investing in and managing real estate. 

While we believe a diversified dynamic macro portfolio holds stocks, bonds, interest-earning cash, commodities, real estate, gold, and cryptocurrency, U.S. Treasuries can play a role, too. Furthermore, even amid short-term disruptions, the domestic bond market’s long-term fundamentals are resilient. Here’s why:

1. Safe-Haven Status

Allio is not Pollyanna about the state of federal finances. Congress has a spending problem, not a revenue problem, and Congress is never serious about balancing the budget. Hence, the Department of Government Efficiency (DOGE) is tasked with independently and systematically cutting out at least some of the wasteful spending in Washington. 

In the face of soaring debt in recent years and drunken-sailor spending initiatives under President Biden, investors at home and abroad view Treasuries as the world’s premier safety asset. It's backed by the full faith and credit of the U.S. government. Even when rates spike, there’s no serious doubt that the U.S. won’t make good on its obligations. 

That's not set in stone, though. Ray Dalio’s Big Cycle outlines that world orders evolve and devolve. President Trump’s focus on strengths within our borders and becoming less vulnerable to foreign financial adversaries, aims to maintain the dollar and U.S. Treasuries’ important roles in global markets. 

2. Economic Dominance and Future Growth

The U.S. economy continues outperforming its peers with strong growth, technological innovation, and a flexible labor market. As President Trump’s policies—deregulation, tax cuts, and energy independence—take effect over the next 12-18 months, economic conditions could potentially strengthen as current policies initiatives take effect. Pro-growth and pro-business policies are key for success in the decades to come.

A sustainable expansion built on Main Street’s health and confidence (not on inefficient federal projects) brings prosperity to all, including our allies in Europe and other developed nations. The U.S. is only about 5% of the world’s population, but we command about a quarter of aggregate GDP. The best and brightest want to do business here and call America their home.

3. Inflation and Yield Dynamics

We touched on how vast the Treasury market is and how it moves based on perceptions about future growth, inflation, and the state of federal finances. Debt-to-GDP must be reined in, but higher interest rates are not necessarily a bad thing. They can signal optimism about macro trends in the years ahead.

The zero-interest rate policy (ZIRP) from the Obama era was toxic and distorted risk management decisions. Normal borrowing costs can attract global capital and reinforce the dollar’s strength, and hence, U.S. Treasuries.

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Cautionary Signals from Gold and Bitcoin

Investors should heed what gold’s rally and the rise of bitcoin could portend about the global economy’s future. Gold is up more than 1000% so far this century. It has outperformed the S&P 500 over the past three years and even over multiple market cycles in the previous two decades. The sellside repeatedly lifts its collective forecast for the yellow metal as central banks diversify their holdings by scooping up ounces. At the retail level, demand is as fervent as ever—look no further than how fast Costco’s gold bars sell out when they hit the electronic shelves.

Allio has always included gold in our ideal mix of portfolio assets to weather macro uncertainty and even as bull markets unfold. Likewise, cryptocurrency is not to be dismissed. A $3 trillion marketplace, as global tensions rise—which we believe is likely given the point in the current macro cycle—bitcoin could continue to increase in value, particularly if currency debasement occurs elsewhere in the world. A global currency war cannot be ruled out; just take a look at what China is doing to its yuan today.

Ray Dalio’s Principles and the Case for a Dynamic Macro Portfolio

Jitters over the state of the U.S. Treasury market and the current focus on tariffs overlook broader, more significant forces at play: breakdowns in monetary policy, political riffs, and changing geopolitical orders. These disruptions occur in cycles and are driven by emerging unsustainable forces. 

In a recent post, the Bridgewater Associates founder laid out the state of play. Excessive debt and trade imbalances (namely, the deficit with China) cannot continue without some kind of upheaval. Deglobalization has taken flight, and now forces change in capital flows, which may spark further bond volatility. The April 2025 rate spike reflects a transition from low-rate, high-debt environments to one where growth and inflation reassert themselves. This is not a crisis moment but a potential enduring trend...if appropriate policies are not taken.

Dalio’s case for an all-weather portfolio fits with Allio’s global macro approach. Political polarization and inequality could lead to further breakdowns in alliances. A win-at-all-costs populist zeitgeist differs from the Clinton-Bush-Obama globalization push. The former US-led multilateral order may be replaced by the rise of autocracies and what Dalio describes as a “power-rules” construct. 

For investors worried about the changing world order and sweeping technological shifts afoot, the key is to diversify smartly and balance risks. A dynamic portfolio, which adjusts allocations based on macroeconomic signals, is critical in today’s environment. Opportunities may come about in the fixed-income market—higher yields (including from Treasury Inflation Protected Securities (TIPS)) might make for attractive rebalancing opportunities.

Above all, adapting to the macro environment is key. Rigid portfolios may fail, but flexible ones can thrive. Along with TIPS, commodities and real estate can be effective inflation hedges if Dalio’s views come to fruition. We favor U.S. stocks for the long run, but if there’s an unexpected dollar black swan, holding some international stocks can also be a hedge. Adapting also means being active concerning risk management tactics. Events like the basis trade’s unwind present fleeting opportunities to lock in decent future yields. Knowing where leverage and liquidity risks lie is important.

Partnering with Allio means accessing advanced quantitative hedge fund strategies that seek opportunities through AI for portfolio alpha. Our institutional macro investment approach combines tomorrow's leading technology production allocations with robust downside protection while maintaining flexibility. Stay informed, be nimble, and think long-term by investing with our experts.

The Case for a New Brand of U.S. Exceptionalism

Many investors look at the size of America’s deficit or the recent chaos in the Treasury market and wonder: Is the U.S. losing its edge? 

We’d argue the opposite. 

• We are still the most flexible economy in the world, capable of pivoting quickly to crises. Allio believes that by mid-2026, the U.S. will be poised to outshine other markets. We believe American self-reliance will support the dollar, curb inflation, and attract capital. 

• We are still the center of global innovation. AI, healthcare breakthroughs, energy production, and financial technology are largely US-driven stories.

• We are still the go-to destination for capital, even amid short-run rate volatility.

Fixed-income markets may have been spooked, but the America First agenda aims to reinforce our dominance on the global stage. The coming year may present opportunities for long-term investors. 

The Bottom Line

In times like these, it's easy to get caught up in the noise—spikes in yields, obscure hedge fund trades, and volatility freakouts. But the principles of good investing haven’t changed—it's not a time to abandon Treasuries. The asset class shouldn’t be a massive part of your allocation, but it serves important purposes within a dynamic macro portfolio. 

In the face of dislocations and fearmongering by some, we believe confidence in the U.S. bond market will endure and that the broader domestic economy will remain the best place in the world to invest.

You can explore our AI-powered managed portfolios designed to adapt to the shifting macro environments and help you grow your wealth and reach financial independence.