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By  Timothy C. Murray, CFA®
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Are U.S. Treasuries still a shelter from recession?

Tariffs and Fed policy uncertainty have undermined the traditional role of U.S.Treasuries.

May 2025, Monthly Market Playbook

Key Insights
  • U.S. Treasuries—historically a hedge against an economic weakness—have underperformed in the recent stock market downturn despite rising recession concerns.
  • Non-U.S. dollar bonds issued by governments in other developed markets may offer alternatives for investors seeking to reduce exposure to an economic slowdown.


When stock prices fall sharply, U.S. Treasuries historically have tended to rally. However, that has not been the case during the recent tariff-related stock market slump. Investors may need to consider alternative ways to seek shelter from the storm.

Treasuries have generally done well in past equity downturns because a stock market sell-off often signals a looming economic slowdown or, in some cases, an outright recession.

Investors know that when the economy goes into recession, the U.S. Federal Reserve usually responds by cutting interest rates. Other things being equal, lower interest rates tend to push up U.S. Treasury prices.

U.S. Treasuries are behaving differently this time

(Fig. 1) Cumulative returns for U.S. stocks and U.S. Treasuries in four equity downturns1
U.S. Treasuries are behaving differently this time

As of April 21, 2025.
Past performance is not a guarantee or a reliable indicator of future performance.
U.S. stocks represented by the S&P 500 Index. U.S. Treasuries represented by the Bloomberg U.S. Long Treasury Index.
Sources: Standard & Poor’s (see Additional Information), Bloomberg Finance LP via FactSet.
1 Returns for 3 previous downturns are S&P 500 peak to trough. 2000–2002 = 3/24/2000 through 10/9/2002. 2007–2009 = 10/9/2007 through 3/9/2009.
2020 = 2/19/2020 through 3/23/2020. Cumulative return for most recent downturn is from 2/19/2025 through 4/21/2025.

Figure 1 shows that in the three most recent equity bear markets prior to the most recent downturn, returns on longer-term U.S. Treasuries were sharply positive:

  • In the 2000–2002 bear market, the S&P 500 Index returned -47% while the Bloomberg U.S. Treasury Long Index returned +38%. 
  • During the 2007–2009 bear market, the S&P 500 posted a -55% return but long Treasuries returned +21%.
  • In the 2020 bear market, the S&P 500 returned -34% while long Treasuries returned +13%.

By contrast, in the equity sell-off that began on February 19 of this year, long Treasuries posted a -1.4% return through April 21—even as the S&P 500 returned -15.9%.

Why has it been different this time?

One reason for the surprising performance of U.S. Treasuries is that higher tariffs are likely to slow U.S. economic activity but also threaten to push prices higher. This potentially puts the Fed in a difficult position. Fed policymakers may be less willing to cut rates to stimulate the economy if they fear that inflation could get out of control.

This is also what the futures markets are telling us. Despite growing concerns about the economic impact of higher tariffs, futures contracts have not priced in expectations for a sharp decrease in the federal funds rate—the Fed’s key policymaking tool (Figure 2).

Federal Reserve rate expectations have not moved dramatically

(Fig. 2) Federal funds effective rate and futures markets pricing
Federal Reserve rate expectations have not moved dramatically

January 31, 2023, to April 21, 2025. Actual outcomes may differ materially from forward estimates.
Source: Bloomberg Finance L.P. 

As of April 21, fed funds futures contracts were pricing in four 25 basis point cuts in 2025 and only one additional cut in 2026. This would take the fed funds rate to a lower level than was expected before President Trump’s April 2 tariff announcement—but not dramatically lower.

A rising term premium signals investor caution

Figure 3 shows that the U.S. Treasury 10-year yield actually rose in April, even though fed funds rate expectations fell slightly. This reflected a sharp rise in what is known as the term premium—the yield over and above the rate priced in to fed funds futures. This additional yield compensates investors for the risk that rates will go higher than expected. 

Term premiums on U.S. Treasuries have risen sharply

(Fig. 3) 10-year U.S. Treasury term premium
Term premiums on U.S. Treasuries have risen sharply

April 23, 2024, through April 17, 2025.
Source: Bloomberg Finance L.P.

While it is hard to know precisely what drove this move, possible reasons include foreign entities reducing their U.S. Treasury holdings, higher uncertainty about future Fed policy, and concerns about the enormous U.S. federal budget deficit.

Non-U.S. bonds could be an alternative

Given the abnormal behavior of U.S. Treasuries in the face of rising economic risks, non-U.S. government bonds could be an alternative for investors seeking less volatile assets. This is because central banks in other developed market countries may be less conflicted about cutting rates to fend off economic weakness. Additionally, economic policy in most other nations appears less uncertain compared with the U.S., so a rising term premium may be less of a concern.

Conclusion

The potential for conflict between the Fed’s two main policy goals—supporting employment and controlling inflation—means that U.S. Treasuries have not been as attractive in the recent equity market downturn as they were in past sell-offs. As a result, T. Rowe Price’s Asset Allocation Committee recently moved to an overweight position in international developed market bonds.

Timothy C. Murray, CFA® Capital Markets Strategist
Feb 2025 From the Field Article

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By  Justin Thomson
Feb 2025 From the Field Article

Trump’s tariffs are a wild card for the global economy

Trade wars do not produce winners.

Additional Disclosures

CFA® and Chartered Financial Analyst® are registered trademarks owned by CFA Institute.

The S&P 500 Index is a product of S&P Dow Jones Indices LLC, a division of S&P Global, or its affiliates (“SPDJI”) and has been licensed for use by T. Rowe Price. Standard & Poor’s® and S&P® are registered trademarks of Standard & Poor’s Financial Services LLC, a division of S&P Global (“S&P”); Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”); and these trademarks have been licensed for use by SPDJI and sublicensed for certain purposes by T. Rowe Price. T. Rowe Price’s products are not sponsored, endorsed, sold, or promoted by SPDJI, Dow Jones, S&P, their respective affiliates, and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability for any errors, omissions, or interruptions of the S&P 500 Index.

Important Information

This material is being furnished for general informational and/or marketing purposes only. The material does not constitute or undertake to give advice of any nature, including fiduciary investment advice. Prospective investors are recommended to seek independent legal, financial and tax advice before making any investment decision. T. Rowe Price group of companies including T. Rowe Price Associates, Inc. and/or its affiliates receive revenue from T. Rowe Price investment products and services. Past performance is not a guarantee or a reliable indicator of future results. The value of an investment and any income from it can go down as well as up. Investors may get back less than the amount invested.

The material does not constitute a distribution, an offer, an invitation, a personal or general recommendation or solicitation to sell or buy any securities in any jurisdiction or to conduct any particular investment activity. The material has not been reviewed by any regulatory authority in any jurisdiction.

Information and opinions presented have been obtained or derived from sources believed to be reliable and current; however, we cannot guarantee the sources’ accuracy or completeness. There is no guarantee that any forecasts made will come to pass.

The views contained herein are as of May 2025 and are subject to change without notice; these views may differ from those of other T. Rowe Price group companies and/or associates. Under no circumstances should the material, in whole or in part, be copied or redistributed without consent from T. Rowe Price.

The material is not intended for use by persons in jurisdictions which prohibit or restrict the distribution of the material and in certain countries the material is provided upon specific request. It is not intended for distribution to retail investors in any jurisdiction.

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© 2025 T. Rowe Price. All Rights Reserved. T. Rowe Price, INVEST WITH CONFIDENCE, the Bighorn Sheep design, and related indicators (troweprice.com/en/intellectual‑property) are trademarks of T. Rowe Price Group, Inc. All other trademarks are the property of their respective owners.

202504‑4439856

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