Market Minute: The bond market is not buying it

REAL ECONOMY BLOG | May 15, 2025

Authored by RSM US LLP

The recovery in equity valuations over the past month has been impressive. Driven by the United States’ pulling back from a multifront trade war, the S&P 500 index is essentially flat for the year as of May 14 after a 15.28% plunge through April 8.

But the bond market is seeing something different.

Instead of yields falling as equity valuations have recovered, the fixed income market has focused on the shaky and incoherent foundation of the trade conflict, the unimpressive revenues earned from trade taxes and the growing probability that tax legislation will feature a large tax cut funded by government debt.

Given the risks to the economy—a recession is still a coin flip this year—and recovery in the equity markets, bond yields should be falling.

They are not, and that is because fixed-income investors are sniffing out the logic of economic populism amid a move toward trade protectionism, which strongly implies higher inflation and rising long-term yields.

Of course of that results in additional compensation demanded by investors for holding U.S. Treasury securities under such conditions which is also knows as the risk premium.

And the increase in yields is exactly what has happened over the first two weeks of May.
Should Congress approve a large tax cut that is not paid for, don’t be surprised if the bond market pushes yields back toward mid-April highs, which captured the pushback against the trade conflict.

With the U.S. 10-year yield trading late Wednesday at 4.54%—the high this year is 4.792%—and the 30-year at 4.97%, nearly at this year’s high of 4.974%, remember that any move above 5% at the long end of the curve will result in nothing but trouble and likely bring to an end the recent relief rally in equities.

If investors are looking for a reason to sell in May and go away, it would appear that the bond market might be providing an important forward-looking signal given the plans of the fiscal authority, trade and tax policy.