Bond ETFs Soar as Consumer Confidence Plummets to Crisis Levels

The bond market has emerged as a refuge for investors in early 2025, with bond ETFs surging amid a dramatic collapse in consumer confidence. The April 2025 Consumer Confidence Index (CCI) dropped to 86—the lowest level since the height of the pandemic—and signaled a deepening pessimism about the economy. This sharp decline has reshaped investment strategies, driving a flight to safety that has propelled bond ETFs to record highs.

The Crisis in Consumer Confidence

Consumer confidence has been in freefall since early 2025, with the CCI falling 7.9 points in April alone. The decline was driven by three key factors: tariff-related inflation fears, job market anxiety, and income uncertainty. The Conference Board’s data shows that 32.1% of consumers now expect fewer jobs in the next six months—a figure approaching levels seen during the Great Recession—and 18.2% anticipate income declines, marking the first negative outlook for future earnings since 2020.

The highlights the steep decline, with April’s reading hitting a 13-year low. This pessimism has spilled over into spending plans: dining out, vacations, and home purchases all saw sharp declines in consumer intentions.

Bond ETFs: The Safe-Haven Rally

The flight to safety has been most evident in bond markets. The Morningstar Core Bond Index rose 2.8% in Q1 2025, with long-duration Treasury ETFs leading the charge. The iShares 20+ Year Treasury Bond ETF (TLT) gained 4.5% over five days in early 2025, while the Vanguard Extended Duration Treasury ETF (EDV) surged 7% during the same period. These gains were fueled by falling Treasury yields, which dropped to 4.26% for the 10-year note in February—the longest streak of weekly declines since 2019.

The rally in bond ETFs reflects two key dynamics:
1. Fed Rate Cut Expectations: Markets now price in 150 basis points of Fed rate cuts by mid-2025, with the federal funds rate projected to fall below 3.5% by year-end. This has steepened the yield curve, benefiting long-duration bonds.
2. Tariff-Induced Recession Fears: With tariffs on Canadian, Mexican, and Chinese imports spiking, investors have priced in a higher risk of recession, pushing them toward Treasuries and other safe assets.

Winners and Losers in the Bond Market

Not all bond sectors have thrived equally. Treasuries and inflation-protected bonds have been the standout performers. The Pimco Real Return Fund (PRRIX), which focuses on long-duration Treasuries, gained 4.71% in Q1, while inflation-protected bonds (TIPS) surged 3.87% on average.

Conversely, municipal bonds lagged due to concerns over state budgets and tax policy changes, while high-yield bonds struggled with modest gains (0.86% in Q1) amid widening credit spreads. The Fidelity Advisor Capital and Income Fund (FIQTX), for instance, underperformed after aggressive bets on lower-rated credits backfired.

The Fed’s Role in the Bond Rally

The Federal Reserve’s pivot toward easing has been central to bond markets’ performance. While Chair Powell has emphasized “measures of near-term inflation expectations moving up,” markets remain convinced that the Fed will cut rates to stave off a recession. The Breckinridge Investment Committee projects the Fed will hold rates through Q2 but cut once by year-end—a timeline that aligns with the market’s pricing of a 3.5% fed funds rate by late 2025.

This expectation has steepened the yield curve, with five of six key yield spread pairs now positive. Historically, such a steepening has been bullish for equities, delivering 5.44% average returns over six months when all spreads flip positive.

Risks on the Horizon

While bond ETFs have thrived, risks loom large. Tariff-driven inflation remains a wildcard: the 7% 12-month inflation expectation cited in the CCI survey could force the Fed to pause or reverse course. Additionally, corporate earnings face pressure if tariffs raise input costs, potentially widening credit spreads further.

Geopolitical risks also linger. European defense spending and trade negotiations with China could either stabilize or destabilize markets. The MSCI World Index’s outperformance over U.S. equities in early 2025 highlights investors’ global diversification, but this could reverse if trade tensions escalate.

Conclusion: Positioning for Volatility

The bond ETF rally of early 2025 underscores a simple truth: when consumers fear recession, investors flee to safety. The CCI’s collapse to 86—a level not seen since 2011—has provided a tailwind for Treasuries and active short-term strategies. However, the path ahead remains fraught with uncertainty.

Investors should prioritize diversification and duration management, favoring ETFs with flexibility to exploit Fed rate cuts and yield curve steepening. Funds like Pimco’s inflation-protected bond ETFs or short-term active strategies (1–3 year duration) offer a balance of yield and risk mitigation.

Yet, complacency is unwarranted. If inflation resurges or tariffs trigger a sharper slowdown, bond markets could reverse course. As the old adage goes, the bond market is often right, but not always for the right reasons. In 2025, investors must stay vigilant—because the next leg of this journey could be as volatile as the last.