A Bond Selloff Is Rocking the World. You Might Want to Take the Other Side.

There’s considerable concern about bonds on Wall Street, which may signal that it’s a good idea to invest in them.

Bonds with 10-year Treasury yields rose to 4.772%, the highest closing level since November 1, 2023, and yields on 30-year bonds reached 4.962%.

What’s spooking markets, however, is that a lot of the recent increase in yields seems to be due to something other than people expecting stronger economic growth. Instead, it might just be that investors are requiring a higher return rate – or “term premium” – to hold onto long-term bonds, according to estimates by the Federal Reserve. Some analysts think this is happening because of worries that Donald Trump’s proposed tariffs could cause the global economy to slow down, leading to higher inflation, while his tax cuts add to budget deficits even more.

Interest rates on 30-year government bonds are currently at a record 5.4%. British Treasury chief Rachel Reeves is facing significant pressure after announcing a budget that aims to balance pleasing bond investors with promoting moderate economic growth.

France is facing pressing issues: the government is gridlocked due to opposition from Parliament, and its borrowing costs are now higher than Greece’s.

There’s more bad news, as the value of the British pound and the euro is declining, with the euro nearing the same price as the U.S. dollar. The S&P 500 and the Stoxx Europe 600 both fell -1.5% and -0.8% on Friday, respectively.

Actually, bonds may end up being the safest haven in times of turmoil after all.

In fact, people who predict a financial disaster are probably off base: Countries that create their own money can’t actually default. Furthermore, inflation-linked bonds have sold off, contradicting the notion that investors believe the economy is booming and tariffs are a serious concern for inflation.

It may all come down to interest rates. After December, the Fed has begun to eliminate hopes for a protracted rate-cutting cycle. As a result, the middle section of the Treasury yield curve—ranging from 2 to 5-year maturities—has finally become positively sloped for the first time since 2022. Only the very short end, spanning from 3 months to a year, remains inverted, reflecting the one or two potential cuts that the market suggests may still occur this year.

The reason for alarm is that longer-term bonds have sold off significantly—a “bear steepening” trade, in Wall Street terminology. Historical statistics reveal that the yield curve steepens in just three out of four instances for the opposite reason: a sharp fall in short-term yields triggered by central banks rapidly cutting interest rates. Bear steepenings following a period of inverted yield curves are uncommon, and are typically associated with the “stagflation” periods of the 1970s and 1980s.

This gets right to the heart of the issue. The current situation, in which the central banks effectively raise rates aggressively without hurting the economy, followed by slower cuts accompanied by stern warnings, is an unusual occurrence.

to put their money on hold for a longer time.

The premium remains relatively small: It is reportedly adding 0.6 percentage points to 10-year bond yields, a figure far below the 1.5 percentage point average over history. The slope of most of the yield curve remains relatively gentle compared to previous years.

So why did the stock market’s performance decline sharply on Friday? One key reason might be that stock prices have become over-inflated. Over the course of years, the tech sector being the driver, the S&P 500 has grown very expensive. To the point, even if analysts’ predictions for 2025 come to pass, the S&P 500’s projected earnings return for the next year would be merely 4.6%. This is equivalent to the yield of a 5-year Treasury bond.

To be sure, this doesn’t completely rule out the possibility that production levels could increase further, or that high production levels themselves could have a negative impact on economic growth, especially in other countries.

If the economy and company profits were to really decline, central banks would likely have to take a different approach and become more supportive by boosting the economy with stimulus. Guess which investment type would benefit in that situation: Bonds.

jon.sindreu@wsj.com