3 Warning Signs Flashing Red For Bond Investors

The bond market is an uncertain place right now, as stagflation and rising unemployment make the Federal Reserve’s job of calibrating monetary policy a Herculean task. Even higher inflation seems to be around the corner, too, as tariffs instituted by President Donald Trump begin to bite. 

It’s a tough spot for bond investors to navigate. If the Fed lowers rates, it might immediately lower bond yields and raise bond prices. But it has the potential to increase already rising inflation, which will hurt bond prices and raise yields over time. If the Fed stands pat on rates, the economy could continue to slow, hurting overall economic growth. However, investors now expect the central bank to lower short-term interest rates one or two times this year.

The bond market is one of the best predictors of the economy. Because bonds offer lower returns than stocks, bond investors need to carefully assess the future to make sure they’re going to receive those returns. They have a lot to lose if inflation and interest rates move against them, as bond prices fall when interest rates rise.

However, bonds are in a decent position at the moment despite challenges, say many investors.

“Bonds entered the year with the benefit of higher starting yields, providing a valuable cushion against any potential increase in yield related to higher-than-expected growth or higher inflation,” says Mark McCarron, CFA, chief investment officer, Wescott Financial Advisory Group.

“Despite headlines, we believe the bond market today looks relatively attractive. Investment-grade yields are competitive relative to both history and equity valuations, and corporate balance sheets appear reasonably positioned compared to prior cycles,” says Ryan Patterson, CFA, CFP, chief investment officer, Linscomb Wealth. 

But it’s not “all clear” either. Here are three potential warning signs that bond investors are watching closely.

1. Long-term yields are high — and rising

Longer-term yields have been rising over the last few years, as the economy returned to normal following serious disruptions as part of the COVID-19 pandemic. The yield on the 10-year Treasury seems to have put in a floor around 4.20 percent since October 2024, with only short dips lower. 

“At the present time, one of the red flags that has been problematic is the rise in the 30-year Treasury yield,” says Steven Conners, founder and president of Conners Wealth Management in Scottsdale.

The 30-year Treasury yield has shown a solid uptrend since the pandemic. While that was not totally unexpected as the economy stabilized, it now sits around 4.91 percent. Its yield has surged to levels that haven’t been seen regularly since before the Great Recession.

The surge in the 30-year yield breaks a major secular downtrend in its yield that’s been in place since 1981. Something significant seems to have shifted in investors’ expectations.

“Although 5 percent and higher is only 10 basis points or 0.10 percent higher, it does start to have bond market participants nervous,” says Conners. “The primary reason is that the 10-year yield often follows what the 30-year yield does.”

High long-term yields can stall economic growth. For example, current 10-year Treasury yields — which form the basis of 30-year mortgage rates — combined with high prices have left the housing market on life support. Sales of existing homes are near multi-decade lows. Of course, higher interest rates make it more expensive for businesses to borrow, too, and they make it costlier for the biggest borrower — the U.S. government — to refinance debts at attractive rates.

Longer-term yields could rise for a variety of reasons, not all of them necessarily negative.

“Yields on the long end could rise even if the Fed cuts rates, if economic growth projections or inflation expectations increase, or if investors demand a higher risk premium for holding Treasurys,” says Patterson. 

“If the market comes to expect stronger economic growth or higher inflation than is currently priced in, that will likely drive long-term yields higher,” he says. “Similarly, increased supply of Treasuries or reduced demand from global investors could also push yields upward.”

2. Inflation is rising, and U.S. deficit spending is poised to run even higher

Inflation is poised to rise in the near term, as businesses pass on the effects of the Trump tariffs to consumers. Those effects have only just begun to show up in monthly inflation data. Market-watchers should expect another source of inflation: rising deficit spending. A larger deficit puts upward pressure on prices and interest rates, since the government must borrow to fund it.

Earlier this year, Congress made the 2017 Trump tax legislation — popularly known as the Trump tax cuts — permanent, locking in yesteryear’s deficit spending, and then added even more tax cuts. The incremental deficit for 2025’s One Big Beautiful Act is an estimated $3.4 trillion, according to the Congressional Budget Office. Again, that’s on top of deficits from the 2017 act.

Those deficits are offset somewhat by the effect of tariffs, which also slow economic growth.

“The president’s tariff policies are designed to partially offset the tax and spending cuts in the bill by bringing in more revenue,” says McCarron. “This may be the case, but it also could be that higher tariffs and the higher debt service associated with ongoing budget deficits could cause investors to demand more yield, if debt-to-GDP increases. This would put pressure on the bond market as yields at the longer end of the curve rise further.”

The appetite for U.S. Treasurys is not limitless. If inflation runs too hot, investors will demand a higher reward — a higher yield — for the risks that they’re running. 

3. President Trump continues to attack the Federal Reserve

Trump continues to mount attacks on the Federal Reserve, putting further pressure on the nation’s central bank to lower interest rates even as inflation is rising due to Trump’s tariffs. Trump’s actions undermine the Federal Reserve’s independence, or at least the perception of its independence, which may be just as damaging in the world of “perception is reality” finance. 

Investors are concerned that if the Federal Reserve loses its independence and therefore control of interest rates, inflation could increase dramatically. The loss of independence may have a particularly negative effect on long-term interest rates and bond prices.

“The yield curve could steepen further if the market feels that the Federal Reserve’s independence is at risk, with short rates falling as more cuts are priced in, but long rates rising as investors price uncertainty with respect to inflation and policy,” says McCarron.

Trump has called for massively lower interest rates — 3 percentage points lower, at one time — a move that would rapidly stoke inflation, especially amid rising stagflation. This call for lower rates comes on top of increased deficit spending, which puts upward pressure on rates, too.

But Trump has done much more, veering into politically attacking his perceived enemies when he can’t get his way on lower interest rates. Trump has actively campaigned against Fed Chair Jerome Powell on social media, calling him names and telling him he should resign.  

More recently, Trump has summarily fired one of the Fed’s governors, Lisa Cook, for alleged mortgage fraud. Cook has refused to leave her office for now, and it’s unclear whether Trump has the legal authority to dismiss her. 

This kind of drama in the normally staid world of central banking is giving bond investors and others pause, as a loss of Fed independence could radically raise inflation and hurt bond prices. 

What can investors in fixed income do?

Inflation is already on the way, even if it hasn’t shown up fully in the official figures yet. But all indications are that higher inflation is on the way as tariffs filter through the supply chain. That’s bad news, of course, but what can investors in fixed income do? They’re especially hit hard by inflation, which undermines the value of fixed cash flows and hurts bond prices today.

Stick to short-term bonds

If you stick to short-term bonds, such as Treasurys or corporate bonds, you can significantly mitigate the impact of inflation on bond prices. Normally, rising inflation is accompanied by rising interest rates, which hurt bond prices. This effect is more pronounced in bonds that have longer maturities. The longer the maturity, the more a bond is impacted by a change in interest rates.

So it might make sense to move to shorter-term bonds, including money market funds, if inflation rears its head. The best money market funds will feel minimal impact from rising inflation.

This tactic can be a good solution when investors expect an independent Fed to adjust interest rates to keep inflation in check. But Trump’s antics are causing investors to rethink this normally sound premise. What investors may end up with is falling short-term interest rates even as inflation is rising. Admittedly, that’s not an attractive prospect, but it may be part of the cost of lessening the impact of inflation on longer-term bonds, where you may lose much more. 

Move to CDs

If you want some longer-term fixed-income investments but don’t want to endure a potential fall in short-term rates, it could make sense to try to lock in longer-term CDs, if those fit your needs. FDIC-backed CDs have no principal risk — so the value of your asset won’t ever fall, as it would with a publicly traded bond — though you need to keep your money locked up for the CD’s term.

A CD may be an attractive move if you can lock in one of the best CD rates for the period you need it, and you’ll avoid principal risk and a potential decline in interest rates, which would lower payouts on short-term Treasurys. What you won’t avoid is any impact on your purchasing power if inflation rises significantly and your CD rates don’t compensate for it. 

So you can protect yourself against a few risks, but inflation is always out there. 

Make sure you’re compensated for the risk of inflation

Rising inflation is likely to throw the market for a loop at some point, so if you’re looking for higher yields and want to turn to longer maturities to get it, you need to make sure you’re compensated for the risk of rising inflation. In other words, you need a high-enough yield. Longer-term bonds will fluctuate more than short-term bonds in response to changes in rates.

Given rising deficit spending, tariffs that are boosting inflation and an executive branch that seems set on bending monetary policy to its will, you may need a high return for the risk. 

Bottom line

The bond market is showing signs that it’s pricing in rising inflation, and investors who need exposure to bonds should pay careful attention to the market so that they don’t get steamrolled. Investors, including many banks, who were buying long-term debt at generationally low rates in 2020–2021 quickly found out how devastating a rise in rates and inflation can be to prices. 

Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.