Cracks?

Source: the New York Times

  By Guest Blogger Doug Rowat

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JP Morgan CEO Jamie Dimon last week warned investors of a looming “crack in the bond market.” Donald Trump, a few weeks earlier, further delayed his tariffs after acknowledging that the bond market was “yippy”, a highly unusual admission for a president who always claims his policies are flawless. And then came Moody’s US government-debt downgrade, which eliminated the US’s last triple-A rating from a major ratings agency.

It all painted an ugly picture for the US bond market and led to a concerning spike in yields.

So, does all of the above mark the final straw for US debt?

Time for some perspective.

First, the yield spike. Yes, higher yields suggest less investor confidence and while it was uncomfortable to see, say, the US 10-year Treasury yield in April jump half a percent in a week, sharp fluctuations in Treasury yields aren’t unusual and the yields themselves, relative to the long-term averages, are hardly alarming. Again, using the US 10-year Treasury yield as an example, its yield currently sits at 4.4%, more than a percent and a half below its long-term average.

Bonds, of course, also provide coupons. Bond prices overall haven’t moved a great deal since the start of the year, but US bonds have still done their job of providing income. The Bloomberg USAgg Index, a broad-based benchmark of US investment-grade bonds, including Treasuries and corporates, is actually up almost 3% y-t-d on a total-return basis. Not bad considering that we’re only in June and the long-term average annual return of the Index is only about 5%. In other words, thus far, bonds are on pace to have a remarkably normal year.

As for the Moody’s downgrade? Moody’s joins S&P Global and Fitch in knocking the US off its triple-A pedestal; however, the previous downgrades had no meaningful impact on either the US bond or US equity markets:

Past credit-rating agency downgrades had little impact on US bonds or equities

Source: Bloomberg, Turner Investments. S&P Global downgraded the US August 5, 2011. Fitch downgraded August 1, 2023.

It’s unlikely that the Moody’s downgrade will either. A simple question to ask: if the US isn’t triple-A rated then who is? Would you place more faith in, say, Norway or Luxembourg, which do have triple-A ratings? The truth is, if the US’s going down, it’s taking every other triple-A-rated country with it.

And, finally, US investment grade bonds are once again fulfilling the role that they’re primarily intended for: risk management. After an extended period of higher positive correlations between bonds and equities (not ideal from a risk-management perspective) correlations have dropped into the more traditional low-to-negative range. In other words, US bonds are, once again, doing their job of controlling downside:

Rolling correlation between Bloomberg USAgg Index and S&P 500; bonds are, once again, providing the expected low-to-negative correlations to equities

Source: Bloomberg, Turner Investments

Certainly, this won’t be the last time this year that we hear dire warnings about the US bond market.

However, before you heed them, remember the enormity of what you’re betting against.

America-is-about-to-collapse investors rarely do well.

Doug Rowat, FCSI® is Portfolio Manager with Turner Investments and Senior Investment Advisor, Private Client Group, Raymond James Ltd.

Source: https://www.greaterfool.ca/2025/06/07/cracks-3/