Investors trying to navigate the rocky market may want to turn to a certain class of bonds to help smooth the ride. Volatility is expected to continue this year. On Thursday, the S & P 500 slipped in volatile trading as investors debated President Donald Trump’s tariffs and the health of the U.S. economy after a series of reports that showed some softness. The 10-year Treasury yield also ticked higher Thursday , a day after hitting its lowest level since December. UBS believes the economy is in good shape and doesn’t think the tariffs will lead to a major negative impact on growth. Trump said Thursday his proposed 25% levies on Canada and Mexico will go into effect March 4. China will be slapped with an additional 10% tariff on the same date. “We believe market volatility will likely persist, and the recent movement in bonds reaffirmed that quality fixed income should remain an integral part of a resilient portfolio that can help investors navigate uncertainty ahead,” Solita Marcelli, chief investment officer of the Americas for UBS Global Wealth Management, said in a note on Wednesday. Sticking with quality Quality bonds are among the safest investments, preserving capital and reducing equity volatility, Marcelli noted. “If U.S. growth slows more quickly than expected, we would expect swifter monetary policy easing to underpin a sharp rally in quality bonds,” she wrote. In other words, the Federal Reserve would react to any economic weakness by lowering interest rates, which would raise the value of outstanding bonds. In addition, current yields should help cushion the total return outlook if yields rise in the event of a tariff shock or strong growth scenario, she added. Marcelli is the camp expecting two additional rate cuts by the Fed later this year, which supports the potential for capital appreciation. Vanguard also suggests investors have a balanced and diversified portfolio to help ride out volatility. “Fixed income not only balances out the equity market risk and volatility, but also takes advantage of the high 4%, if not 5+%, yields available on bonds today,” said Jeff Johnson, head of the firm’s U.S. fixed income product. He believes a core bond fund can provide that quality and diversification for investors. The funds invest largely in investment-grade U.S. assets, such as government, corporate and securitized products. Earlier this month, Morningstar screened for the top performing intermediate core bond funds. All are actively managed and have the best returns over the last one-, three- and five-year periods. In its 2025 outlook released in December, Vanguard said it expects long-term yields to remain above 4% due to the firm’s strong growth outlook. “If yields fall because of a negative shock to demand, bonds should provide a hedge in multiasset portfolios,” the money manager wrote. Vanguard estimated an 81% probability that the Bloomberg U.S. Aggregate Index will provide a positive total return over the next year. Negative returns would only occur if yields rose enough to breach the coupon wall and generated a capital loss larger than the income generated from coupons, according to the outlook. Jack McIntyre, portfolio manager for global fixed income strategies at Brandywine Global, also believes quality bonds can help portfolios hold up if investors look for safety in a risk-off environment. “I’m not saying we’re going to go in ‘risk off’ [mode], but we could,” he said in an interview Thursday. “I’m a big believer in unintended consequences, so having some Treasurys and high-quality bonds could actually hold in there.” Looking outside the U.S. That said, investors can also look to add some foreign bonds that offer value, like emerging markets, McIntyre said. “Relative to their inflation, they are very attractive right now,” he said. He said he also expects to see a shift in relative performance of U.S. assets, which is negative for the U.S. dollar. “If I’m right about the dollar’s worth shifting, some emerging market currencies are going to do well,” McIntyre said. “You’re going to get a kicker of currency return, in addition to whatever yield you’re going to earn on those foreign, international or non-U.S. bonds.”
