Key Highlights

• April lessons for investors redefine safe havens, with higher volatility and lack of trend, leaving uncertainty linked to tariffs and monetary policy key.
• Stock and bond price recovery leaves markets nearly flat on the month, obscuring underlying impact of April 2 events on investor confidence, rising risk aversion.
• Global bonds still key barometer for measuring economic risks and the focus for rebalancing portfolios in months ahead.

Investors in the U.S. have room to buy bonds and sell stocks but weak growth is already priced

EXHIBIT #1: U.S. ASSET ALLOCATION OF STOCKS AND BONDS

_{Source: BNY iFlow}

U.S. investor asset allocation doesn’t normally move much, with changes in stock or bond holdings of around 0.5% the norm over the last ten years. However, we saw an outsized decrease of 2.5 standard deviations in U.S. stock holdings in favor of bonds in April. This trend started when President Trump first began discussing tariffs and accelerated when the tariffs were actually implemented. We have seen a substantial increase in bond holdings of 5% over the last two months. There has also been a notable decline in equity holdings of 12%. There is less urgency in the rest of the world to deal with U.S. tariffs and other policy shifts. The mismatch in economic outlooks and policy flexibility will be important for how investors view May and the risks ahead for the U.S. dollar, bonds and equity markets.

Our take

There are many drivers of portfolio asset shifts, with the increase in volatility and valuation metrics the top ones. The S&P 500 VIX index spiked over 30% during the first two weeks of April, forcing equity liquidations. Q1 earnings releases have been an important market stabilizer, tempering worst-case scenario fears along with Trump’s 90-day tariff pause. While there was a similar bond liquidation after April 5, net money in fixed income rose but mostly in the front-end – meaning duration was not in favor in the U.S. in April. We did see a significant rise in cash on the month as investors globally displayed home bias and risk aversion. How this plays out in May will be important to the ongoing debates about U.S. risk premiums for both bonds and stocks.

Forward look

The risk of recession due to tariff uncertainty is important for investors. Historically, average bond asset allocation rises until the Fed cuts rates as the economy falls into recession. While this scenario has yet to occur in 2025, we are watching for signs of economic weakness. Global investors are in wait-and-see mode, watching for any new risk cuts. Globally in April, bond buying beat equity selling on the margin, but APAC and EMEA clients are better set up for economic weakness, with fewer equity holdings. For the U.S., this means volatility-adjusted returns will be lower and positions will likely continue to be forced lower, as volatility remains high. Home bias shows up in both stocks and bonds. The playbook for May will depend on how central bankers react to the hard data ahead with downside expectations for growth and upside fears of inflation. The overall mood for bonds leans toward a bull steepening as the risk of global recession persists. 

EXHIBIT #2: REGIONAL FIXED INCOME ASSET ALLOCATION

_{Source: BNY iFlow}

Equities have been more volatile than trending in April, but cross-border outflows stand out

EXHIBIT #3: U.S. CROSS-BORDER EQUITY FLOWS 

_{Source: BNY}

April’s U.S. cross-border equity outflows demonstrate that April 2 was not solely a U.S. domestic event. Selling by foreigners was another 2.5 standard deviations on “Liberation Day,” while the recovery in flows has been modest over the last two weeks of April. Cross-border holdings are now 15% below the 10-year average. The three biggest outflows are connected with the U.S. election, Trump’s inauguration and the announcement of U.S. tariffs.

Our take

Holdings of U.S. stocks by cross-border investors have shifted since the start of the year. The cracks in U.S. exceptionalism are due to doubts about the U.S. economy, the cost of tariffs that will be borne by consumers and the pain of valuations being too high following two years of outperformance by Big Tech stocks. Flows in April confirm that investors abroad are wary of U.S. stocks in general, with selling specifically of high valuation stocks – with an eye toward decoupling AI. There is also some rotational bias, with a focus on more tariff-resistant sectors like health care and real estate. From a U.S. perspective, we have seen more buying of the dip on hopes of Fed rate cuts and more tariff talks.

Forward look

The key risk for U.S. equities is in how growth and inflation data play out in May and June. The FOMC is expected to return to easing and cut rates by 25bp in June. Further easing would require more evidence of a rolling recession risk, namely unemployment over 4.5% and a lower GDP. The U.S. economic data this week will be critical to how markets start May. Furthermore, the data we see suggest there is more room for equity selling in the event of a larger economic slowdown, as U.S. holdings are still more biased toward equities than bonds. A move from an equity asset allocation of 70% to 60% to 50% takes time for longer-term investors. For the rest of the world, this is less of an issue.

Dollar’s rebalancing mixed, as bond market signals stronger for month-end

EXHIBIT #4: END-APRIL REBALANCING FLOWS BASED ON BOND MARKET PERFORMANCE

_{Source: BNY}

Based on asset changes and realized flows, we think some of the biggest adjustments involve addressing equity performance shortfalls and managing dollar hedges. Even before looking at the rebalancing situation due to asset returns, one of the core asset allocation decisions FX managers will have to make is whether to reduce some hedges on the dollar made through the first three weeks of April. As the dollar ended the month materially weaker, some recovery flow is needed, whereas the supposed “alternatives” in favor during that period will face selling pressure.

Our take

Based on our iFlow data, G10 commodity bloc currencies with highly rated bond markets such as AUD and NOK will face strong rebalancing pressure. The dollar will likely see light gains, but as throughout the month the greenback also benefited from “safety” flows into dollar cash (rather than U.S. Treasurys). FX market participants looking for a very strong dollar rally will be disappointed. The strongest signals we identify are in GBP and INR, especially based on bond flows. Our data show that not only was GBP strongly sold through August, but the gilt market had its weakest month since the mini-budget crisis in 2022. Meanwhile, INR found light bids while its sovereign debt market was one of the strongest performers globally, buoyed by index inclusion-based allocations. Consequently, recovery flow into the U.K. and additional FX hedging in India may stand out toward month-end (Exhibit #4).

Forward look

FX markets have calmed over the past month, but tariff-related volatility risk will persist. Consequently, as rebalancing ends, we do not expect risk appetite to mount a comeback in May. Risk aversion has indeed bottomed out, but idiosyncratic fiscal risk in emerging markets and a global push to accelerate rate cuts will undermine any push into yields at the expense of funders such as JPY, CHF and EUR. We expect the market to remain tactical, and significant FX hedging will follow any flows into underlying assets.

Bottom Line

Rapid declines in equities and bonds in April for the U.S. matter more than in other countries. Equities in the LatAm region have done the best in April while bonds in APAC lead. There is a view that the U.S. exceptionalism trade that dominated 2024 has ended. What isn’t clear is what will replace it and that shows up in the data we see across the world, with a buyer’s strike on U.S. assets more pronounced than usual given the price action. Volatility across all markets is high and seems to be in a different paradigm given doubt about safe havens.