When safe havens fail: The breakdown of the bond-equity relationship

When safe havens fail: The breakdown of the bond-equity relationship

In April this year, as U.S. equity markets fell – dragged down by Trump tariff headlines and inflation fears – long bond yields, arguably, should have declined as investors fled to safety. At first, the 10‑year Treasury yield dipped to 3.86 per cent on April 4, but by April 9, rather than continuing to fall, yields surged, with the 10‑year up to around 4.50 per cent and the 30‑year jumping 54 basis points – breaking the usual inverse correlation between stocks and bonds.

The U.S. bond market didn’t behave as it should have when equity investors became nervous – rather than US Treasuries offering a haven, investors saw them as sources of risk.

This dysfunctional reaction has since led some commentators and analysts to argue that the usual flight‑to‑safety dynamics are breaking down.

Debt service risk: A silent driver behind bond selling

One argument is that bond investors may be more concerned about the size of U.S. debt servicing obligations. With rising Treasury issuance to fund Trump’s Big Beautiful Bill Act’s increased deficits, “bond vigilantes” may be demanding higher yields as a form of protest – selling bonds and forcing borrowing costs upward, anticipating sustained deficits and fiscal strain.

If that’s right, then long-term interest costs, tied to fiscal irresponsibility, are becoming a credit-risk concern, and the bond market response in April reflects that worry more than cyclical recession fears.

Foreign support: Global appetite for treasuries retreats

Foreign demand for U.S. Treasury securities has declined sharply in 2025, even amid global uncertainty – a red flag to many observers. Bank of America tracks a decline of over US$60 billion in foreign holdings since April, with the noted participation in a May 20‑year Treasury auction hitting its lowest since July 2020.

Elsewhere, Apollo Chief Economist Torsten Sløk highlights a consistent downward trend in indirect bidding at the 30‑year auctions – typically proxies for foreign central-bank interest – suggesting a retreat from long-term U.S. paper.

Academic researchers echo this concern: the prominent “reverse conundrum”, where long yields rose even as short rates fell, is plausibly linked to a sharp decline in foreign official demand, as global institutions offloaded dollar reserves amid geopolitical and regulatory uncertainty.

Since May, auction demand has been robust. In mid‑June, the US$22 billion 30‑year bond auction delivered strong demand with bonds sold at a yield of about 4.84 per cent, below prevailing market levels at the tim – an indicator of eager demand. Similarly, strong demand has been seen at more recent 10-year, seven-year and five-year TIPS auctions. 

But, while bid‑to‑cover ratios have remained above historic norms (around 2.4–2.5), foreign participation has shrunk from over 50 per cent of issuance in the 2000s to near 30  per cent by end‑2024, raising concern that future auctions may struggle unless domestic demand steps in.

Of course, weaker auction demand could mean growing cost of financing U.S. deficits and rising uncertainty about borrowing costs and the fiscal outlook.

The April bond-market conniption may have been an anomaly. Conversely, the lack of a typical “safe-haven bid” despite a stock‑market drop may not be a fluke. Instead, it could be part of a broader shift to rising anxiety over U.S. fiscal sustainability.

Taken together, bonds misbehaving during equity turmoil, fiscal risk increasingly priced into long-dated yields, foreign investors pulling back from US Treasury exposure, and any future strained auction demand would suggest the US will face rising interest costs and a self-fulfilling spiral that would be good for no one.

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Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.

He is also author of best-selling investment guide-book for the stock market, Value.able – how to value the best stocks and buy them for less than they are worth.

Roger appears regularly on television and radio, and in the press, including ABC radio and TV, The Australian and Ausbiz. View upcoming media appearances. 

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