Charles Schwab Tells Investors To Prioritize 'Low Volatility, High Quality' Investments Amid Century-High Tariff Turmoil

As the bond market reels from the spiking yields and the surge in volatility, analysts at Charles Schwab are predicting that last week’s “Trump put” was a potential policy response to the bond market and not the stock market.

What Happened: Charles Schwab highlighted in its recent note that the significant yield fluctuations in bond markets were fueled by the unprecedented level of uncertainty, with the U.S. weighted average tariff rate reaching a century-high.

However, Schwab advised the investors to adopt a factor-based approach, screening for high-quality investments. “Low volatility, low beta, high interest coverage, and stable profit margins are among the characteristics that have fared well in this recent bout of turbulence.”

While these factors might underperform during brief periods of tariff relief or delay the news cycle, they are expected to provide resilience during periods of heightened uncertainty, stated the note.

This bond market volatility, measured by the MOVE index or the Merrill Lynch Option Volatility Estimate, surpassed the stock market’s CBOE Volatility Index or VIX, indicating a deep-seated unease among fixed-income investors.

This led to a 90-day pause in the tariff implementation, also described as the “Trump put,” as stated in the note.

Schwab's Chief Fixed Income Strategist, Kathy Jones, explained that the rapid shifts in tariff policies were leading to adjustments in growth and inflation expectations, causing sharp yield movements and catching many traders off guard.

Adding to the concern was the divergence between the U.S. dollar and interest rates. “The dollar fell sharply while yields rose sharply. That does suggest foreign selling was a factor. But it also smacks of a loss of confidence in the United States as a perceived safe haven, which isn’t good for the world’s reserve currency. This is the type of action you see in emerging markets when volatility hits,” said Jones.

Why It Matters: The long-term bond yields jumped after President Donald Trump announced reciprocal tariffs on the U.S. trading partners, which the administration described as the “bad actors”.

The 30-year Treasury surged over 5%, and the 10-year Treasury yield also shot up over 30 basis points from below 4% to over 4.5% in the week after the introduction of the tariffs.

While Trump said in a Truth Social post that he paused the tariffs owing to the negotiation attempts by 75 countries, many analysts believed otherwise.

"In the end, Trump’s stunning about face on tariffs was driven by chaos in the bond market including soaring 10yr and 30yr treasury yields,” said Gary Black, the managing partner, the Future Fund LLC.

Ed Yardeni from Yardeni Research said, "Bond vigilantes hit another homerun." Whereas, economist Craig Shapiro said, "China, just by threatening to sell USTs, basically blew up the bond market and forced the admin to backtrack."

The Dow closed Monday 10.1% below its 52-week peak of 45,073.63. The S&P 500 ended 12.06% off its 6,147.43 high, and the Nasdaq 100 was 15.42% below its 22,222.61 record.

The SPDR S&P 500 ETF Trust SPY and Invesco QQQ Trust ETF QQQ, which track the S&P 500 index and Nasdaq 100 index, respectively, were higher in premarket on Tuesday. The SPY was up 0.14% to $539.87, while the QQQ advanced 0.33% to $459.01, according to Benzinga Pro data.

As of the publication, the yield on the 10-year Treasury bond stood at 4.39%, whereas the two-year Treasury yielded 3.86%.

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