Investors brace for more market volatility amid tariff uncertainty

Tariff tension fuels volatility fears across bond and stock markets

Investors seek clarity on trade negotiations, but market turbulence may continue

As the second quarter progresses, investors hoping for breakthroughs in U.S. trade negotiations with countries like Japan, China, and Mexico may instead be met with continued volatility in both bond and equity markets.

Uncertainty surrounding the scope and permanence of the Trump administration’s tariff policy has heightened financial instability, particularly in the U.S. Treasury market — often considered the bedrock of global financial security.

Treasury market faces dual risks of inflation and recession

Analysts point to multiple stress factors converging on the bond market: fears of a domestic recession, rising inflation expectations, and diminished foreign appetite for U.S. assets. The resulting selloffs in Treasury securities have sent yields soaring, especially on long-term debt, while undermining confidence in traditional safe-haven instruments.

“There’s still a high level of uncertainty about U.S. trade policy and what the ultimate tariff regime will look like,” said Gennadiy Goldberg, head of U.S. rates strategy at TD Securities. “This ambiguity is weighing heavily on investor sentiment.”

Trade talks advance slowly amid skepticism

Despite reports of "satisfactory" progress in U.S.-Japan negotiations and active discussions with China and others, investors remain unconvinced. Markets responded tepidly to the latest developments, with the Dow Jones Industrial Average and Nasdaq Composite declining for a third consecutive day last Thursday. Concurrently, Treasury yields rose — a sign that inflation concerns remain prevalent.

Many analysts now believe any eventual deals may not fully roll back tariffs. Instead, new agreements might result in rates that remain significantly above pre-April levels, even if lower than initially proposed.

Between January 20 and April 11, average tariffs on U.S. imports surged from 3% to 10.3%, per the Peterson Institute for International Economics. Oxford Economics estimates the effective weighted average could be as high as 33% following the president's brief tariff pause on April 9.

Inflation shock on the horizon?

For many on Wall Street, the key concern is whether this is a temporary spike or a more entrenched trend. Market-based inflation instruments suggest a persistent rise in prices through mid-2026. Derivative fixings point to consumer price index readings exceeding 3% for a year starting this summer.

Some estimates, including those from hedge fund WinShore Capital Partners, place the core CPI — excluding food and energy — at 3.7% over the next 12 months, up from 2.8% in March.

“Whether tariffs produce sustained inflation or a short-term shock remains uncertain,” said Gang Hu, a portfolio manager at WinShore. “But expectations are clearly shifting toward higher inflation for now.”

TIPS stumble despite inflation concerns

Despite their inflation-protection function, Treasury Inflation-Protected Securities (TIPS) have underperformed. Last week’s $25 billion auction of 5-year TIPS saw weak demand, especially from indirect bidders. According to Hu, this reflects stress in the inflation market and diminishing investor confidence in TIPS’ ability to hedge effectively.

“TIPS have become a damaged product,” Hu said. “Many funds have exited the space, and the market no longer sees them as a dependable inflation hedge.”

Divergent signals from Treasury auctions

Although concerns persist, demand for U.S. debt hasn’t disappeared entirely. Strong bids at recent auctions — including $39 billion in 10-year notes and $22 billion in 30-year bonds — show continued interest, even amid volatility. Treasury yields remain sensitive to inflation expectations, economic outlooks, and changing demand dynamics.

Still, Goldberg notes that international investors have begun questioning the long-term reliability of Treasurys amid shifting U.S. trade and fiscal policy. “The fact that people are even asking whether Treasurys are still a safe haven is itself alarming,” he said.

Key economic indicators ahead

This week, investors will monitor fresh economic data for early signs of tariff effects. On Wednesday, S&P Global will release preliminary purchasing managers’ indexes for U.S. services and manufacturing. Friday will bring the final April reading of the University of Michigan’s consumer sentiment index — another potential gauge of public and market confidence.

For now, financial professionals remain cautious.

“There’s a wide range of possible outcomes ahead,” said Brian Mulberry of Zacks Investment Management. “We’re seeing a day-to-day repricing of risk, and that’s driving much of the market’s behavior right now.”

As long as trade policy remains a moving target, volatility in both bonds and equities may become the norm rather than the exception.

Stay tuned to The Horizons Times for expert insights into market dynamics and the evolving global trade landscape.