Bond market developments

Financial markets benefited from a much-improved tone last week, specifically Tuesday through Friday. From Monday’s close, the S&P 500 rallied 7% and bond yields fell 17 bps (to 4.25% on the 10 Year Treasury). There were several specific catalysts, with most emanating from Capitol Hill:

1. Treasury Secretary Scott Bessent said the tariff standoff with China is “unsustainable,” expected “de-escalation”
2. President Trump said he has “no intention” of firing Fed Chair Powell
3. President Trump said Chinese tariffs will come down “substantially”
4. Alphabet reported earnings, beating Street expectations

While we don’t want to overemphasize the importance of one week, much less one news event, we’re thankful that the talk of replacing Chair Powell, in particular, retreated as quickly as it arose. Central Bank independence is table stakes for well-functioning capital markets. There are notable cases in which that is not the case. We’re optimistic the administration recognizes that.

Regarding trade, it would seem the administration has softened from their April 2nd maximalist approach to tariffs. Negotiated deals seem to be the objective, even when it comes to China. Why the change in tone arose is not completely clear. We believe the emergence of Secretary Bessent played a role, but it would also seem that the president has a pain point: 4.5% on the 10 Year Treasury—the level reached when tariff anxiety hit a high a couple weeks ago. Whether that level holds remains to be seen, but it’s notable that we’re a quarter point lower since, including a welcome decline over the last four days.

Looking out several weeks and months, we think markets will continue to be whipsawed by tariff policy news flow. No doubt there will be noise among the signal, which markets will react to. A meaningful positive would be credible evidence of a deal with China, likely in the form of a “memorandum of understanding”—or even earlier if an agreement could be reached with an economically significant country like Japan.

Diversified asset allocation, and more importantly sticking with it, has been our best advice this year. Given the two-way volatility thus far—there have been 10 days in 2025 in which the S&P 500 has risen or fallen by 2% or more (13% of all trading days)—it’s understandable how any investor may feel inclined to make a change. But time and again we learn that volatile markets are the worst time to make large asset allocation changes. Under the surface, though, our portfolio managers have been hard at work re-underwriting what they own and upgrading the quality of their portfolios. Apart from portfolio maneuvering, volatility can be taken advantage of in your wealth plan—there are wealth-building opportunities that should be considered at times like these.

To conclude, we’re encouraged by the change of tone last week. And while we’re not ready to call the “all-clear” signal, we think we may have seen the worst of this crisis. This week we’ll hear from 40% of the S&P 500 reporting Q1 earnings, as well as an important update on the labor market this Friday. To be clear, damage has been done this month which may still land the US in a recession, but much of that may have been priced in when we were trading at lows earlier this month. Time will tell.