The Bond Market Faced a Volatile First Half—What’s Next?

For all the volatility in bond markets this year, interest rates haven’t changed much—but sustained decreases in long-term rates may be on the way.

Federal Reserve rate cuts would lower interest costs for credit cards, student loans, and other products based on short-term rates. However, the Fed has less influence over longer-term rates, such as the 10-year U.S. Treasury. Those are based more on how markets view the economy and inflation in the decade ahead.

Forecasting the next decade is always tricky, but it got even harder in April. Bond markets were volatile as traders fretted Trump’s tariffs could drive inflation, tank the economy and reshape supply chains permanently.

Fears dissipated after Trump paused many tariffs, but May saw more volatility as higher U.S. fiscal deficits worried investors. 

June was tamer, as inflation data stayed mostly subdued and economic data underperformed. If that sticks, long-term rates may fall as investors price in a weaker outlook.

Longer-dated bonds look “attractive,” said Brij Khurana, a portfolio manager at Wellington Management. 

Outperformance in bonds would mark a shift after the toll that post-COVID inflation spikes took on the bond market. Bonds have historically been a safe haven from volatile stocks—bonds did well whenever stocks suffered—but the last few years threw off that correlation. 

The relationship may return if the economy weakens.

“If we are moving into a much slower growth environment than we thought, I think bonds have a better hedging capability to stocks than they have in quite some time,” Khurana said. 

What May Cause Rates to Stay High?

But there’s also a risk that rates will stay elevated. 

The Fed could keep short-term rates high, dampening hopes that long-term rates will follow them downward. While tariff-driven inflation hasn’t shown up yet, it’s a risk that has thus far kept the Fed on hold.

“I don’t think that they need to lower rates at the moment,” said Cal Spranger, fixed income manager and wealth manager at Badgley Phelps, adding that rates aren’t “what is giving the economy heartburn.”

The Fed keeping rates flat could increase its friction with Trump, who’s pressed Fed Chair Jerome Powell to slash rates and give the economy an extra boost. Powell’s term is up in May 2026, but Trump has weighed picking a new Fed chair far sooner than that.

Naming a successor before the end of Powell’s term would create a “shadow Fed chair,” who could influence the policy outlook based on public comments. The Wall Street Journal reported that Trump was considering that prospect late last month. 

The scenario has long unsettled markets—that Trump’s desired pick will call for rate cuts even if the Fed thinks otherwise. That could damage the central bank’s credibility with investors—who have long valued the Fed’s ability to make decisions independently.

“The announcement of a ‘shadow’ Chair risks a loss to Fed independence that pushes longer-dated yields higher,” wrote Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets.