Stay Invested, Diversify Your Bonds

Another burst of tariff headlines has knocked the S&P 500 2.6% lower on the week and pushed the 30-year US Treasury yield back through 5% for the first time since 2023, after a lacklustre bond auction and fresh talk of unfunded tax cuts.

Volatility is the entry fee for equity premia

Long-term investors who stayed put during April’s sell-off were reminded that markets often rebound when sentiment is bleak. History shows that missing just the five best trading days since 1988 would have cut cumulative returns by roughly 37 pp. In other words, discipline still beats market timing.

My own stance remains that an equity “core” should ride through the noise, with any tweaks focused on factor exposure rather than headline allocation.

Treasuries: from haven to headache

Bonds are meant to offset equity risk. Yet with the US running fiscal deficits north of 6 per cent of GDP and issuing ever more paper, Treasuries have begun to trade like a risk asset: the 30-year yield’s jump above 5.1% came during an equity draw-down, not after it.

That shift is steering global money towards alternative duration anchors:

10-year sovereign	Yield (%)
UK Gilt	4.68
Italy BTP	3.62
Spain Bono	3.21
Japan JGB	1.53

Diversifying across these markets—ideally with currency hedges where appropriate—now offers similar or higher carry with less direct exposure to Washington’s fiscal wrangles.

Follow the flows

The rotation is already visible. LSEG Lipper reports $9.4 billion of net outflows from global equity funds last week, led by an $11 billion exodus from US mandates; Europe, by contrast, attracted $5.4 billion of fresh money. Meanwhile the dollar index has dropped more than 8 per cent year-to-date as investors trim overweight US positions.

A cheaper dollar flatters non-US returns for sterling-based investors and lowers the cost of hedging overseas bond coupons back into GBP.

MY PERSPECTIVE

Markets are throwing the kind of volatility that tests conviction but also rewards clear thinking. I still see the equity risk-premium as attractive for patient money, yet I no longer treat Treasuries as a “free” hedge. Diversifying duration—particularly into quality European and Japanese paper—looks sensible while Washington wrestles with ever-looser fiscal discipline. Staying invested, but in a smarter mix, is my core message.

Bottom line

Volatility is unsettling but not unusual. Equity risk is still rewarded over time, provided you stay invested. What has changed is the reliability of Treasuries as a shock-absorber. Shifting part of your duration exposure into high-quality European or Japanese paper—and keeping some dry powder in short-dated bills—can cushion portfolios without sacrificing yield.

Stay invested, stay diversified, and, most importantly, stay disciplined.