How Bonds Are Pricing a Trump Comeback

Stick with Short-Term Bonds, but Growth Concerns Persist

President Trump’s trade-war policies continue to pose challenges for investors, as market volatility underscores uncertainty alongside mixed signals from the bond market.

On Tuesday, 2-year Treasury yields hovered around 4.21%, just below their 200-day moving average, according to FactSet data. Meanwhile, 10-year yields stood at approximately 4.51%, significantly above their average over the same period.

Tracking yield trends over time offers key insights, yet both short- and long-term yields remain elevated compared to late August—when Federal Reserve Chair Jerome Powell signaled an impending shift toward rate cuts. This pattern persists despite previous Wall Street warnings to lock in yields before anticipated rate reductions. Since September, the Fed has lowered its short-term policy rate by 1 percentage point.

“There are two narratives the bond market is grappling with,” said Lawrence Gillum, chief income strategist at LPL Research, in a phone interview on Tuesday.

Short-term Treasury yields reflect inflation concerns and the Fed’s cautious approach to rate cuts, Gillum noted. Another key factor is tariffs—while they elevate prices, they also dampen economic growth. Gillum expects Trump’s tariffs to put downward pressure on 10-year yields, likely bringing them into the low 4% range later this year as investors react to slowing growth.

Investment Strategy: Where to Focus

For fixed-income investors, Gillum recommends focusing on shorter-duration bonds. “The biggest ‘bang for your buck’ in terms of yield per duration is in the short end of the Bloomberg Corporate Index,” he said.

Examining different bond maturity segments within the index helps assess how a portfolio might respond to interest rate fluctuations over time. “Right now, the economy is in good shape, but it probably won’t be toward the end of the year,” Gillum told MarketWatch. He advises those managing fixed-income portfolios against taking excessive rate risk until economic data weakens.

“There’s still a lot of value in the front-end,” Gillum added, noting that shorter-duration bonds continue to offer yields around 4.5%—higher than most of the past decade.

Trump’s unpredictable tariff policies introduce additional risks. BofA analysts estimate that the S&P 500 could face an 8% hit to earnings per share if 25% tariffs on Mexico and China, along with incremental 10% tariffs on China, are implemented.

While concerns over market volatility strengthen the case for bond investments, waiting too long for aggressive Fed rate cuts amid economic downturns carries its own risks.

“The key takeaway,” Gillum emphasized, “is that volatility in fixed-income markets isn’t going away.”

On Tuesday, the S&P 500 rose 0.8%, the Dow Jones Industrial Average gained 0.4%, and the Nasdaq Composite increased 1.2%, according to FactSet data.