Karishma Vanjani

U.S. stocks are feeling the heat from Washington's tariff policies, with the S&P 500 now on track for its first quarterly decline in over a year -- but the bond market has traded in a tight range, showing composure in the face of chaos.

President Donald Trump announced 25% tariffs on vehicles and auto parts imported into the U.S. on Wednesday. Tariffs on steel and aluminum went into effect earlier this month. Reciprocal tariffs, matching levies and other trade barriers erected by all countries, will be unveiled on April 2. Tariffs will raise inflation, and neither stocks nor bonds are a fan of it. The S&P 500 has rocked between daily gains and losses in March, and is now positioned to end the month down 6.3%, the biggest loss since September 2022. Stocks are down 5.1% for the first quarter, the worst quarterly loss in three years and the first since late 2023.

Barclays and Goldman Sachs toned down their optimism for the S&P 500 this month, slashing their 2025 S&P 500 predictions to 5900 and 6200, from 6600 and 6500, respectively.

Conversely, bonds largely stayed steady this month. Yields on the 10-year Treasuries, the most used benchmark, have closed within range of 4.36918% and 4.17815 % in March. That's a gap of 0.191 percentage points. The last time yields traded in a range this tight was about four years ago in the month of June 2021, the Dow Jones Market Data team says.

Yields respond to changes in bond prices, meaning prices of bonds unlike stocks, haven't moved much despite heightened economic uncertainty due to tariffs. Consider this: The 10-year yield rose 0.03 percentage point or was virtually unchanged on Wednesday when car tariffs were announced.

The restraint can be explained in two ways: One reason could be that bond investors are uncertain about the full impact of tariffs, so they aren't reacting strongly yet.

"There will be inflation -- that is not an open question. What's unclear is the magnitude of the pass-through to consumer prices that US households will be able to absorb without a material change in spending patterns?," Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets, wrote in a note that explained the muted response.

While tariffs are top of mind for all investors, the bond market is finding comfort with data on employment and economic growth. This week's initial jobless claims showed effectively no change, while latest gross domestic product $(GDP.UK)$ for the fourth quarter was revised 0.1% higher this week. It suggests the economy rests on solid pillars, indicating that tariffs are being imposed on a strong foundation that may ultimately be able to withstand them.

The second reason for the relative stability could be the Treasury Secretary Scott Bessent, who has been ironically referred to as the an adult in the room on Wall Street. Time and again Bessent has made it clear: He wants 10-year rates low. The decision is by no means entirely in his hands, but he has done part of the job by communicating plans to leave sales of long-term bond steady "for at least the next several quarters."

The outlook for debt and deficits is key for the market as investors want higher yields to digest the supply. Bessent's assurance could be countering an upward move in yields, holding them stable for now.

During the first two months of President Trump's second term the equity market has primarily focused on the least important policy initiative, trade, "while the Treasury market's emphasis has been titled towards the most important initiative, reduced government spending," according to Barry Knapp at Ironsides Macroeconomics.

The iShares Core U.S. Aggregate Bond exchange-traded fund, a widely cited bond fund, is down 0.5% this month, a better showing than the stock market. It's up 1.9% for the quarter while the S&P 500 is in the red.

The big question now is at what point does the bond market lose its temper. Non-partisan agency, Congressional Budget Office, on Thursday projected federal debt to rise from 100% of GDP this year to a record of 107% of GDP at the end of 2026, exceeding the peak seen immediately after World War II . Mounting debt frightens bond investors as it raises concerns about the ability to pay back the debt. It will also eventually slow economic growth, push up the amount the nation pays to foreigners in interest as yields on the 10-year rise.

Don't frighten the bond market.

Write to Karishma Vanjani at karishma.vanjani@dowjones.com.

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March 31, 2025 02:00 ET (06:00 GMT)

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