Bonds are Telling the REAL Story!

Bonds Get Bombed… and Gold Hangs On!

Treasury bond prices aren’t often seen in the financial headlines, but suddenly they’re a topic of interest. Bond prices and yields are considered the “canary in the coal mine” for the major U.S. stock indexes, meaning that sophisticated investors monitor the bond market closely for early signs of trouble with stocks.

Not enough retail investors are in the habit of watching bond prices, so now’s a good time to start if you’re not already doing this. This year’s on-again, off-again reciprocal tariffs provide a textbook example of how short-term financial traders will sometimes move into cash-equivalent assets as a knee-jerk reaction to unexpected events.

“Unexpected” could be a misleading term to use here, however. From the outset, President Trump told people that he would use tariffs to promote fair trade and generate capital in lieu of taxing Americans. And now he’s using tariffs, following through on his promise even though some people apparently didn’t believe he would actually do this.

At the same time, the Federal Reserve is apparently in “no hurry” to rush in and rescue large-cap stocks with immediate interest-rate cuts. With the Fed staying on the sidelines, U.S. Treasury note yields are free to fly higher and, as a result, the prices of these bonds are susceptible to a full-on crash.

Although you can’t go to Walmart and buy groceries with Treasury notes, global investors consider these bonds as the equivalent of cash. Yet, don’t assume that holding government bonds – or holding cash, for that matter – is a completely safe bet for the long term.

Cash has relentlessly lost its purchasing power over time, and inflation has been particularly problematic since the COVID-19 pandemic. And whether it’s in the short or long term, if you bought and held Treasury bonds, you could be in a world of pain right now:

Courtesy: Yahoo Finance

Mainstream media commentators blame arbitrage “basis trades” for the short-term bond market chaos. However, this doesn’t explain the relentless, long-term deterioration of U.S. government bonds.

Perhaps some folks are finally waking up to the notion that government debt notes were never really a “risk-free” investment in the first place. Andrew Brenner, head of international fixed income at National Alliance Capital Markets, warns, “We have been banging the tables for years that the depth of liquidity in the Treasury market is poor and has been for years.”

It’s not just a liquidity problem; it’s also a trust issue, since foreign investors don’t necessarily trust U.S. government debt notes, including both bonds and dollars. Nomura Securities International strategies Jonathan Cohn observes “heavy foreign real money selling” in Treasuries, while State Street Global Markets London strategist Michael Metcalfe cautions, “The dollar is not getting support from yields and that suggests the dollar is not a currency safe-haven.”

Plus, amid a fierce trade war (which could continue for a while even if it’s on “pause”), nations are bound to continue their policy of de-dollarization. Indeed, this is already happening, with China’s Central Bank asking (i.e., demanding) state-owned banks to reduce U.S. dollar purchases.

In a similar vein, Citigroup analysts acknowledge “signs of possible demand destruction for U.S. Treasuries.” That’s quite an understatement given the sharp sell-off in American bonds – but then, big-bank analysts may be reluctant to fully admit that global investors are dumping U.S. debt notes.

Courtesy of Reuters

Clearly, the U.S. bond market is in shambles and investors don’t want to touch it with a ten-foot pole. The old “wisdom” that investors should hold 60% stocks and 40% government bonds simply doesn’t pass the common-sense test in 2025.

Courtesy: @XavierComelli

Meanwhile, gold may wobble sometimes but it’s holding up extremely well in 2025 so far. The ongoing trade war is one reason among many, with China and other nations rapidly divesting their U.S. bonds and dollars in favor of physical gold.

The carnage isn’t limited to American government bonds, by the way, as there are also reports of a global bond sell-off. Yet, U.S. debt is the central target of de-dollarization and this is showing up in the data, with the dollar falling against the euro, yen, and Swiss franc.

With bond-market fragility in focus and nations reducing their dependence on dollars and Treasurys, investors can consider better portfolio strategies with less counterparty risk. This isn’t the COVID-era “dash for cash”; it’s a flight to value and reliability that was, frankly, long overdue.

And it’s not fundamentally about tariffs, even if that’s the excuse for the major market rotation that’s in progress today. It’s actually about people discovering what’s true versus what’s manufactured, and choosing real assets over government promises.