When things get dicey, many investors — both equity and fixed income — turn to one asset class to reduce volatility, ride out the storm and achieve positive returns. And that would be U.S. Treasury bonds. After all, these investment-grade bonds, backed by Uncle Sam, have never defaulted, pay steady coupons, and represent the bedrock of the global fixed-income market. So, it’s easy to see why they are a great safety net for many portfolios.
But lately, Treasury bonds haven’t been acting like themselves.
The once-steady asset has become volatile as various factors, including geopolitical pressures and risks, come into play. The question now is whether Treasuries remain a safe haven for portfolios, or is it time to reconsider this idea for the long term?
Treasuries are Behaving Weirdly …
Historically, when economic weakness grows, recession risks rise and other risks enter the system, investors turn to U.S. Treasuries for comfort. Thanks to the size of the U.S. government, its assets, and its ability to increase taxes — not to mention the ability to print money — Treasury bonds are as safe as they come. They have never missed a payment, are incredibly liquid, and offer a competitive rate for investors both big and small.
Because of these factors, as an asset class, they tend to be pretty stable — offering fixed-income investors a base to build their portfolios and equity investors a port in the storm during uncertainty. For example, during the dot-com crash bear market, the S&P 500 Index returned a negative 47% while the Bloomberg U.S. Treasury Long Index gained +38%. More recently, during the pandemic, stocks managed to lose 34%, while Treasuries returned 13%. 1
But lately, things have not been normal in the U.S. Treasury market.
The equity sell-off that began in February has seen the bond market show losses. From the beginning of the sell-off on February 19 through the post-Liberation Day malaise on April 21, long Treasuries posted a -1.4% return. And as equities have started to pick up speed heading into the summer, bonds have continued to show volatility and losses.
This chart from T. Rowe Price shows how Treasuries are behaving amid market uncertainty. As you can see, the path today is very different than previous paths of equity downturns.
Source: T. Rowe. Price
Why the Shifting Sands?
The question for investors is why the change in direction? Why have Treasuries lost their mojo and their safe-haven status?
According to investment bank BNP Paribas, the MOVE index, which measures fixed-income volatility, surged to 140 on “Liberation Day.” Relative to history, that reading was one to four standard deviations above average. This surge in volatility highlights the rising uncertainty within Treasury bonds and the United States’ ability to keep good on its promises.
For one thing, investors have continued to be concerned about rising debt levels, and changes to tax policies could boost that debt further. Tax proposals are expected to increase the Federal deficit by about $7.8 trillion over the next decade.
Expressing skepticism over current fiscal proposals and that these proposals are unlikely to reduce deficits materially, credit agency Moody’s downgraded the U.S. long-term issuer and senior unsecured ratings from Aaa to Aa1. Moody’s is now the third major credit rating agency to downgrade the U.S., following S&P Global and Fitch back in 2011 and 2023, respectively. Moody’s has had the United States as a pristine “Aaa” rating since 1919.
Meanwhile, there’s been an absence of foreign investment in Treasuries. Rising risks aside, according to BlackRock, the sell-off in the U.S. dollar has made Treasuries a relatively expensive asset for foreign buyers. Currently, U.S. Treasuries offer a lower hedged yield compared to domestic 10-year government bonds in the United States and other countries, such as Europe and Japan. Yields in the U.S. have risen relative to those in foreign markets to provide price-sensitive international investors with sufficient incentive to buy U.S. assets. 2
The same can be said for investors here at home. Yields have risen as so-called bond vigilantes have stepped in and are now worried about federal fiscal health. Bond yields have started to creep higher, pushing down prices and making the safe-haven asset class less so. The budgetary woes within the U.S. are prompting investors to seek safety elsewhere.
A Safe, but Risky Asset
With rising fiscal woes and continued volatility, the safety of Treasury bonds is now being . And investors have the right to feel nervous. There are a lot of new risks now being priced by the market and that’s increased the overall volatility of the asset class. So, what to do? The obvious answer is to diversify your bond portfolio. Many pundits still maintain that Treasuries are safe, as in not defaulting, and investors still receive coupon payments. The ballast of them in a fixed-income portfolio is the issue.
That could mean leaning on other investment-grade bonds for safety. To that end, a so-called core plus bond fund could be the best strategy. With managers allowed to move beyond Treasuries and into other investment-grade bonds like corporate and MBS, these funds can provide some of the missing safety that investors crave.
Additionally, looking towards municipal bonds or focusing on the shorter end of the curve could prove fruitful. The finances of a local government or the State of Texas have little to do with the federal government, while shorter-dated Treasury securities pay great rates and are less volatile than their longer-dated sisters.
Core Plus & Total Return Bond ETFs
These ETFs were selected based on their low-cost exposure to active bond management. They are sorted by their YTD total return, which ranges from -2.8% to 2.8%. They have expenses between 0.18% and 0.70% and assets between $3B and $23B. They are currently yielding between 4.4% and 9%.
| Ticker | Name | AUM | YTD Total Ret (%) | Yield (%) | Exp Ratio | Security Type | Actively Managed? |
|---|---|---|---|---|---|---|---|
| SRLN | SPDR Blackstone Senior Loan ETF | $4.36B | 2.8% | 9.0% | 0.70% | ETF | Yes |
| MINT | PIMCO Enhanced Short Maturity Active ETF | $9.7B | 2.2% | 5.1% | 0.35% | ETF | Yes |
| JPST | JPMorgan Ultra Short Income ETF | $22.8B | 1.9% | 5.4% | 0.18% | ETF | Yes |
| TOTL | SPDR DoubleLine Total Return Tactical ETF | $3.1B | -0.7% | 5.2% | 0.55% | ETF | Yes |
| BOND | PIMCO Active Bond ETF | $3.5B | -1.1% | 5.0% | 0.58% | ETF | Yes |
| DFCF | Dimensional Core Fixed Income ETF | $3.35B | -1.3% | 5.0% | 0.19% | ETF | Yes |
| FBND | Fidelity Total Bond ETF | $5.1B | -1.5% | 4.9% | 0.36% | ETF | Yes |
| FIXD | First Trust TCW Opportunistic Fixed Income ETF | $4.4B | -2.8% | 4.4% | 0.65% | ETF | Yes |
Short-Term Bond ETFs
These ETFs are selected based on their ability to tap into short-term duration bonds at a low cost. They are sorted by their YTD total return, which ranges from -0.7% to 0.8%. Their expense ratio ranges from 0.03% to 0.55%, while they yield between 2% and 4.8%. They have AUM between $730M and $58B.
| Ticker | Name | AUM | YTD Total Ret (%) | Yield (%) | Exp Ratio | Security Type | Actively Managed? |
|---|---|---|---|---|---|---|---|
| LDUR | PIMCO Enhanced Low Duration Active ETF | $989M | 0.8% | 4.8% | 0.51% | ETF | Yes |
| SPSB | SPDR Portfolio Short Term Corporate Bond ETF | $7.3B | 0.5% | 4.8% | 0.04% | ETF | No |
| DFSD | Dimensional Short-Duration Fixed Income ETF | $1.55B | 0.5% | 4.5% | 0.17% | ETF | Yes |
| FSIG | First Trust Limited Duration Investment Grade Corporate ETF | $731M | -0.4% | 4.7% | 0.55% | ETF | Yes |
| SHY | iShares 1-3 Year Treasury Bond ETF | $26B | -0.2% | 4% | 0.15% | ETF | No |
| SCHO | Schwab Short-Term U.S. Treasury ETF | $12.4B | -0.2% | 4.2% | 0.03% | ETF | No |
| SUB | iShares Short-Term National Muni Bond ETF | $8.8B | -0.4% | 2% | 0.07% | ETF | No |
| BSV | Vanguard Short-Term Bond ETF | $58B | -0.7% | 3.2% | 0.04% | ETF | No |
Overall, the tariffs have exposed some significant uncertainty and issues within U.S. Treasury bonds, and they aren’t acting as they should. Investors looking at the ballast aspect of Treasuries may need to look elsewhere within the investment-grade universe for guidance.
Bottom Line
With fiscal and economic vagueness due the tariffs, investors in U.S. Treasuries are facing some tough decisions. The asset class may be losing its safe-haven status and portfolio rebalancing tool. To that end, core plus funds and going short could be the answer.
1 T. Rowe Price (May 2025). Are U.S. Treasuries still a shelter from recession?
2 BlackRock (May 2025). A risky safe asset: The vulnerabilities of US Treasuries
