While history doesn’t exactly repeat itself, it sure does rhyme. And right now, investors are looking for the rhyming pattern with President Trump, his policies, and his second term. This is particularly true within the bond sector. In his last term, Trump increased volatility of the normally staid fixed-income markets, causing a flattening of the yield curve and rising credit spreads.
The question is whether his policies will produce more of the same.
So far, it promises to be a similarly bumpy ride. For investors, looking into the past can provide guidance for the future. While every presidency is different, Trump 1.0 could provide the guidelines for navigating the current bond market and possibly even prospering
A Look At Trump’s First Term
For investors, President Trump has quickly become known for at least one thing: his “shoot from the hip” style of management. Often, the administration has made decisions on the fly and is willing to quickly reverse policy points amid disapproval or other factors, only to reenact them again. His first term was marked by a series of these decisions and policy points.
Market participants generally don’t like quick decisions or rapidly changing policy points. If nothing else, they like policies of a steady, eddy nature — even if it is negative. This allows businesses, investors, and bond issuers time to plan their course of action.
So far, Trump 2.0 — marked by uncertainty and volatility — is starting to look and feel like Trump 1.0, particularly when it comes to the bond markets.
During his first term, tariff points versus China and changes to NAFTA with Canada and Mexico created a sense of economic uncertainty. This impacted interest rates and the credit markets. Many investors are worried about recession and economic growth. To that end, they flooded long-term bonds as a safe haven.
As a result, the yield curve flattened. Demand for long-term bonds rose, prices grew, and yields dropped. However, to cool rising inflation, the Fed kept raising rates on short-term bonds. This chart from LPL shows the spread between 2-year Treasury notes and 10-year Treasury bonds. As you can see, the spread between the bonds shrank during Trump 1.0, 2016 through 2020, flattening the curve.
Source: LPL Finanical
LPL highlights a second major bond market trend to emerge from President Trump’s first term: the volatility in credit markets outside the safety of U.S. Treasuries.
During the trade tensions with China and overall economic uncertainty, credit spreads between investment-grade corporate bonds and high-yield/junk bonds vs Treasuries widened as investors fled these riskier assets and looked toward the safety of U.S.-backed debt. According to LPL, during the height of the trade tensions — 2018 to 2019 — investment-grade corporate spreads grew by 75 basis points. Meanwhile, high-yield spreads expanded 225 basis points — much of which came over a period of just two months. While spreads did shrink and recover in 2019, they also remained volatile, expanding and contracting over several more periods throughout his first term. 1
Finding the Pattern
Only a few months into his second term, we are seeing a similar pattern with regard to policy. For example, Trump’s tariff policies have been on and off, turning from threats to actions and then back several times now. Like before, this is creating plenty of uncertainty and volatility in the bond markets.
Just like Trump’s first term, we’re starting to see the yield curve flatline. But as we said, history does not repeat, it rhymes. The curve appears to be flattening. Short-dated Treasury yields have moved higher as the Federal Reserve won’t be able to cut rates like it originally planned. Investors have started to lock in income accordingly. At the same time, longer-term yields have declined on worries that the economy will stall. Investors are again buying bonds to grab a “safe and steady” return.
The result is that the gap between the 2-year and both the 10-year and 30-year bonds has narrowed
As for credit spreads, it’s been pretty steady. But just like Trump 1.0, that steadiness quickly turned nasty. High-yield (HY) and investment-grade (IG) option-adjusted spreads remain near historic highs, at the 3rd and 2nd percentile of their historical ranges, respectively. That doesn’t leave much wiggle room for error. It also mirrors what happened before the U.S./China trade war and 2018, with similar tightness of spreads.
The only difference is that credit markets were somewhat buoyed due to the fact that the Fed had room to cut rates. This is setting up for a repeat of the heightened volatility in credit.
Playing the Rhyme
None of this is set in stone and the bond markets may not end up like Trump’s first term. However, with the similarities, investors may want to plan for that contingency. The Bloomberg Agg Index spent much of Trump’s first term treading water until the COVID-19 pandemic when the index took off, producing a 15% return from the start of Trump’s presidency.
So, how to prepare? Well, a great start could be to bet on intermediate bonds. With the yield curve flattening, both the short and long ends are becoming volatile. The middle of the curve has been smooth, with the two extremes pivoting around it. Buying bonds here allows investors to avoid some of the volatility. Investors could smooth their rides even further by adding a touch of ultra-short duration bonds that just step out beyond cash and haven’t moved very much about the yield curve.
Investors should be prepared to bet on the carry or coupon clip. Right now, starting yields are better than they were in 2016 and investors have plenty of places to park their cash and grab high yields. However, volatility is going to push around the prices of bonds as per Trump’s first term. This means that yield is the key to getting a good return. Here a touch of active management could do wonders by adding bond sectors and taking advantage of yield opportunities as they arise.
Intermediate Treasury Bond ETFs
These funds are selected based on exposure to intermediate Treasury bonds and the 10-year Treasury note. They are sorted by their YTD total return, which ranges from 2.5% to 3.5%. Their expense ratio ranges from 0.03% to 0.15% and they have AUM between $162M and $40B. They are currently yielding between 3.1% and 4.3%.
| Ticker | Name | AUM | YTD Total Ret (%) | Yield (%) | Exp Ratio | Security Type | Actively Managed? |
|---|---|---|---|---|---|---|---|
| UTEN | US Treasury 10 Year Note ETF | $162M | 3.5% | 4.3% | 0.15% | ETF | No |
| IEF | iShares 7-10 Year Treasury Bond ETF | $33.1B | 3.4% | 3.5% | 0.15% | ETF | No |
| SPTI | SPDR Portfolio Intermediate Term Treasury ETF | $7.5B | 2.8% | 3.5% | 0.03% | ETF | No |
| VGIT | Vanguard Intermediate-Term Treasury ETF | $39.6B | 2.7% | 3.5% | 0.03% | ETF | No |
| SCHR | Schwab Intermediate-Term U.S. Treasury ETF | $10.4B | 2.7% | 3.6% | 0.03% | ETF | No |
| IEI | iShares 3-7 Year Treasury Bond ETF | $15.8B | 2.5% | 3.1% | 0.15% | ETF | No |
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 2.6% to 3.5%. They have expenses between 0.19% and 0.71% and assets between $3.5B and $18.1B. They are currently yielding between 4.1% and 5%.
| Ticker | Name | AUM | YTD Total Ret (%) | Yield (%) | Exp Ratio | Security Type | Actively Managed? |
|---|---|---|---|---|---|---|---|
| BOND | PIMCO Active Bond ETF | $5.4B | 3.5% | 4.9% | 0.71% | ETF | Yes |
| FIXD | First Trust TCW Opportunistic Fixed Income ETF | $4.3B | 2.9% | 4.2% | 0.65% | ETF | Yes |
| TOTL | SPDR DoubleLine Total Return Tactical ETF | $3.5B | 2.9% | 5.0% | 0.55% | ETF | Yes |
| FBND | Fidelity Total Bond ETF | $18.1B | 2.6% | 4.3% | 0.36% | ETF | Yes |
| DFCF | Dimensional Core Fixed Income ETF | $4.52B | 2.6% | 4.1% | 0.19% | ETF | Yes |
In the end, Trump 2.0 has a lot in common with Trump 1.0, especially within the bond market space. Several trends are emerging that mirror trends during his first term — rising volatility and a flattening of the yield curve. While it’s still early innings for bond investors, the similarities warrant some consideration and action. Planning for these trends could be a lifesaver down the road.
Bottom Line
Trump’s second term is already looking like his first with regards to the bond sector. As the yield curve flattens and credit volatility increases, investors need to dig into their previous playbooks to have a smooth sailing experience in their bond portfolios.
1 LPL (February 2025). Will History Rhyme? Fixed Income Themes During the First Trump Administration
