Investors are rushing into bonds despite inflation fears, says Charles Schwab

The 10-year U.S. Treasury bond climbed for a second straight day as investors piled into safer assets, brushing aside inflation fears in favor of growing concerns about an economic slowdown.

“It looks like the bond market has decided to bypass short-term inflation concerns and focus on the long-term prospects,” wrote Kathy Jones, chief fixed income strategist at Charles Schwab, on Wednesday.

Bonds typically lose value when inflation rises since higher short-term interest rates make existing, lower-yielding bonds less attractive. But that’s not what’s happening now.

Instead, fears of an economic downturn are driving bond prices higher, as investors seek stability.

In a recent interview with CNBC, Nanette Abuhoff Jacobson, global investment strategist at Hartford Funds, pointed to tariffs on Canada, Mexico, and China as a key driver of the bond market’s recent moves.

“We’re seeing evidence, both in the soft data and the hard data, that this is not only having an inflationary impact but also a negative growth impact,” Jacobson said.

Other bonds are gaining attention too

Beyond Treasuries, investors are looking at municipal bonds as another hedge against economic uncertainty.

Lisa Shalett, Chief Investment Officer at Morgan Stanley, noted that city-issued bonds currently offer an average return of 4.9%, making them a compelling option.

Investors are also turning to core bonds—corporate-issued and government investment-grade bonds that provide a low-risk cushion during market downturns. “Core bonds have proved their worth during growth shock fears,” wrote J.P. Morgan’s chief market strategist on Tuesday.

Junk bonds: high risk, high reward?

While some investors seek stability, others are chasing high-yield “BB” junk bonds, betting on their upside potential even in a volatile market.

Investment firm GMO has been backing BB bonds, arguing that some below-investment-grade debt has recovered but still carries a lower rating—offering higher returns with reduced risk.

“We expect them to outperform, especially in an adverse market scenario,” GMO portfolio managers wrote on Wednesday. GMO noted that BB bonds have delivered returns 11.7% higher than government bonds, making them a riskier—but potentially lucrative—alternative.

For more cautious investors, municipal bonds remain a steadier, lower-yield option, offering reliable returns without the speculative risk.