MW As tariffs stoke fears of supply-chain disruptions, here's where Vanguard sees demand for bonds

By Christine Idzelis

Tariffs are a 'double-edged sword,' says Vanguard's Rebecca Venter

The bond market has been volatile in April amid concern that tariffs will spark supply-chain disruptions, potentially leading to a worrisome economic scenario of higher inflation and slower growth.

But amid this month's market turmoil, Vanguard has seen signs of strong demand for ultrashort-duration Treasurys as well as appetite for U.S. government debt with intermediate-termed maturities, according to Rebecca Venter, the asset-management firm's senior fixed-income product manager.

Take the Vanguard 0-3 Month Treasury Bill exchange-traded fund VBIL, which listed on Feb. 11 and already has almost $1 billion of assets under management, Venter said in an interview. She said that fixed-income fund flows this month have reflected "a flight to quality" amid tariff-related fears.

Tariffs are a "double-edged sword," as they risk slowing economic growth and stoking inflation, she said. "It's not good for the fiscal picture."

Read: Bonds struggle since 'liberation day' tariffs, but Fed is in no rush to cut rates

Investors who are overweight long-term Treasury bonds may experience more volatility compared with U.S. government debt with a shorter duration, according to Venter.

Before President Donald Trump announced sweeping tariffs on April 2, traders were already fretting that the large U.S. fiscal deficit risks pressuring long-term Treasury yields higher. When yields go up, bond prices fall.

Although "tariff talk exacerbates" concerns over the so-called term premium - the extra yield that investors demand to be compensated for the risk of holding long-term U.S. government debt - Venter said she still views the U.S. Treasury market as a "safe haven."

In considering the evolving role of Treaurys in portfolios, BlackRock Investment Institute said in a note Monday that "we have long expected structurally higher interest rates." BlackRock highlighted the recent rise in the term premium for the 10-year Treasury note in the chart below.

"We argued in 2021 that higher inflation and interest rates at a time of elevated debt create a 'fragile equilibrium' for U.S. bonds, one vulnerable to shifts in investor confidence," BlackRock wrote. "The recent unusual surge in Treasury yields as U.S. stocks and the dollar slid suggests a desire for more compensation for risk and brought that fragile equilibrium into sharp focus."

On Monday afternoon, the yield on the 10-year Treasury note BX:TMUBMUSD10Y was trading about 6 basis points higher at around 4.39%, adding to its month-to-date climb, FactSet data show, at last check.

Supply-chain concerns

Meanwhile, the Trump administration's trade policy is helping to fuel a global transformation, according to BlackRock.

"Predicting the end state of a transformation is near impossible, compounded now by unpredictable trade talks," the firm said in its note.

"By pushing to reduce the trade deficit quickly, the U.S. will find it harder to finance its debt, especially if unpredictable tariff negotiations dent the confidence of foreign investors," BlackRock wrote. "That points to higher bond yields and debt servicing costs, upending budgetary arithmetic."

After Trump's April 2 announcement on so-called reciprocal tariffs sparked market carnage, the White House said that it was pausing those levies on countries, except for China, for 90 days as it carried out negotiations.

"Global supply chains can evolve over time but cannot be rewired at speed without major disruption," said BlackRock. "Tariffs not only raise costs but can cut access to key inputs and potentially halt production," the firm warned. "That risks a growth slowdown or recession with high inflation, just like in the pandemic."

Bond performance

So far this month, shorter-duration Treasurys have fared better than long-term U.S. government debt.

For example, the iShares 1-3 Year Treasury Bond ETF SHY has posted a total return of 0.5% in April, while the broader U.S. bond market has stumbled.

On Monday afternoon, the yield on the 2-year Treasury note BX:TMUBMUSD02Y was down about 7 basis points at around 3.73%, FactSet data show, at last check.

In terms of actively managing duration, Venter said Vanguard has favored intermediate maturities of around 5 to 7 years.

Meanwhile, the index-tracking Vanguard Intermediate-Term Treasury ETF VGIT has been attracting inflows so far in April, she said.

The fund was nearly flat on a total return basis as of Monday afternoon, compared with a total gain of 0.2% for the Vanguard 0-3 Month Treasury Bill ETF month to date.

By contrast, the Vanguard Long-Term Treasury ETF VGLT has lost a total 4.4% so far in April, according to FactSet data on Monday afternoon. That's worse than the broader U.S. investment-grade bond market, which is also in the red this month.

For example, the iShares Core U.S. Aggregate Bond ETF AGG has lost 1.2% on a total return basis so far in April, according to FactSet data on Monday afternoon.

-Christine Idzelis

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April 21, 2025 15:05 ET (19:05 GMT)

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