Bonds slump but short-term Treasurys hold steady as tariffs heighten stagflation fears

By Christine Idzelis

'We stay underweight long-term Treasurys,' says BlackRock

Short-term Treasurys were holding steady Monday, even as the broader bond market slumped as large tariffs appeared to heighten investors' fears over stagflation.

Exchange-traded funds that hold short-term Treasurys, such as the SPDR Bloomberg 1-3 Month T-Bill ETF BIL and iShares 1-3 Year Treasury Bond ETF SHY, closed Monday about flat, according to FactSet data.

The broader U.S. bond market finished the trading session in the red, with the Vanguard Total Bond Market ETF BND posting a sharp 1.2% drop, as traders appeared to weigh the risk of tariffs increasing inflation as well as slowing growth under a stagflationary scenario. Longer-term Treasurys were particularly hard hit, with the iShares 20+ Year Treasury Bond ETF TLT slumping 3% on Monday.

BlackRock's investment institute said in a note Monday that it was allocating more to "short-term U.S. Treasurys that could benefit as investors seek refuge from volatility." The firm pointed to the major shock to markets last week after President Donald Trump's April 2 announcement of large reciprocal tariffs.

"We see more pressure on risk assets in the near term given the major escalation in global trade tensions," Jean Boivin, head of BlackRock Investment Institute, said in Monday's note. "We trim our short-term tactical horizon and reduce risk."

The strategy note from BlackRock featured a chart highlighting stagflation worries by tracking the Federal Reserve's growth and inflation projections for 2025. The Fed's last summary of economic projections was released in March - before Trump's reciprocal tariffs announcement on April 2 roiled markets and increased recession fears.

Treasury yields fell last week as investors sought safety amid the market tumult. But long-term interest rates climbed in the fixed-income market on Monday, sending bond prices lower.

For example, the yield on the 10-year Treasury note BX:TMUBMUSD10Y jumped 17.2 basis points to 4.164%, marking its largest daily jump since last April based on 3 p.m. Eastern time levels, according to Dow Jones Market Data.

Wall Street has been revising its forecasts for U.S. growth and inflation this year due to tariffs, with fixed-income analysts at JPMorgan Chase & Co. saying in an April 4 research note that they now expect real gross domestic product in the U.S. to contract in 2025.

See: JPMorgan fixed-income analysts: 'Real GDP to contract under the weight of the tariffs'

Also read: Barclays revises inflation forecast up after tariffs, expects GDP decline

Investors have been monitoring White House negotiations with the countries slated to see so-called reciprocal tariffs go into effect on April 9. China retaliated last week, slapping large tariffs on goods imported from the U.S.

"We expected risk assets would remain under pressure until uncertainty starts to dissipate - and it's now less clear over how long or short a period policy uncertainty could cloud the outlook," said Boivin. "We now see a bigger growth drag and inflation boost."

Check out: How investors can navigate stagflation worries sparked by White House policies

BlackRock has reduced its equity exposure, including to U.S. and Chinese stocks, while also expressing concern that long-term-bond yields will remain higher than levels seen before the COVID-19 pandemic, according to the note.

"We stay underweight long-term Treasurys given persistent U.S. deficits and sticky core inflation," Boivin said. "Tariffs and looser fiscal policy in some parts of the world will likely push up on inflation."

The U.S. stock market was choppy Monday, with S&P 500 SPX finishing 0.2% lower, according to FactSet data. The iShares MSCI China ETF MCHI, which provides exposure to Chinese stocks, tumbled 8% on Monday.

-Christine Idzelis

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