As the global trade war escalates, the spectre of a sudden slowdown in US growth is no longer just dinner-party chatter—it’s gripping financial markets and rewriting the playbook for investors everywhere.
Equities and bonds have had a rocky ride through the first quarter, thanks in no small part to President Donald Trump’s tariff blitzkrieg. Yet amid the chaos, one trend has crystallised: in a world gone haywire, bonds are back in fashion, while equities are—politely put—on the naughty step. Even the dollar, once the go-to bastion of calm, is dithering in its role as a safe haven.

US Treasuries outperformed equities this quarter, returning more than 2.5%, while the S&P 500 stumbled around 5%. This marks the first time since the pandemic’s onset in early 2020 that bonds rose and stocks slumped over three months. It’s a twist that would make any old-school portfolio manager nostalgic.
Central banks have shifted their allocation preferences towards bonds for the first time in “several” quarters, citing mounting political risks and downside threats to growth. It’s the kind of market cocktail central bankers dread: asset price wobbles, global uncertainty, and an administration that appears to believe tariffs are both a diplomatic tool and a growth strategy.
Since the end of February, a staggering $5 trillion has evaporated from US equity valuations.

Investors are tentatively embracing the return of the classic stocks-and-bonds inverse correlation, a dynamic missing in action since inflation gate-crashed the party in 2022. Lastly, bonds deliver “real returns”—i.e., yields above inflation. It’s the ideal time to increase fixed-income allocation.
And how they’ve outperformed. Five-year Treasuries led the charge this quarter, their yields plunging over 40 basis points to around 4%, pushing the gap with 30-year bonds to the widest since 2022. Wall Street has been practically wooing them for months now, thanks to their sweet spot between inflation resilience and limited fiscal exposure.
In contrast, two-year bonds are twitchier than a cat in a room full of rocking chairs—highly sensitive to every Fed whisper. Long bonds, meanwhile, remain haunted by the ballooning US deficit.

Markets are now pricing in a scenario where tariffs spark both inflation and a deceleration in growth—what could go wrong? Since January, five-year real yields have plummeted by 65 basis points, while inflation breakevens have edged higher. The bond market says: “We don’t believe in this plan.”
Fed Chair Jerome Powell maintains a diplomatic poker face, insisting any tariff-induced inflation will be “transitory”—a word that aged particularly badly last time it was in vogue. St. Louis Fed President Alberto Musalem was more forthright last week, warning that assuming short-term price pressures will magically dissipate is not exactly policymaking at its finest.
For now, investors are stuck navigating an environment where traditional relationships are tentatively re-emerging—but under the looming shadow of economic nationalism. As Washington redefines global trade with blunt instruments and rose-tinted memories of factory belts, the bond market may be the only grown-up in the room.

Central banks—including the Fed—could be left paralysed if tariffs push prices up while strangling growth. Should rates be raised during a slowdown or lower during inflation? Either way, monetary policy becomes a political football rather than an economic tool. The phenomenon is called stagflation.