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If higher tariff-related inflation is a risk, it’s not showing up in the bond market, at least not yet. Yields remain near the lowest levels of the year, suggesting that fixed-income investors aren’t convinced that pricing pressure is a bigger threat vs. slowing economic growth.
To the extent investors prioritize softer economic conditions, the sentiment tends to lift bond prices, and lower yields. When concerns about rising inflation take center stage in markets, the opposite usually unfolds: lower bond prices, which lifts yields. For the moment, at least, the focus is on the former narrative.
The US 10-year Treasury yield, for example, remains close to its lowest level of the year, trading at 4.03% on Tuesday.
Another sign that the fixed-income markets appear unconcerned with inflation risk is the widespread bond rally so far in 2025. Using a set of ETFs as proxies shows that a general upswing in prices through Oct. 14. Leading this year’s performers: long-term corporates (VCLT), which is up more than 9%.
The Federal Reserve is also a factor in persuading the bond market that inflation is a secondary concern vs. softer economic conditions. Federal Chair Powell yesterday suggested that the central bank will soon cease reducing the size of its bond holdings. He also offered hints that more interest rate cuts are coming.
“The data we got right after the July meeting showed that … that the labor market has actually softened pretty considerably, and puts us in a situation where the two risks are closer to being in balance,” he said.
The Fed funds futures market is pricing in high probabilities for rates cut at the next two FOMC meetings on Oct. 29 (98%) and Dec. 10 (95%).
The key uncertainty currently revolves around official inflation data, which has been delayed due to the government shutdown. The September report for the consumer price index (CPI) was originally scheduled for today, but has been postponed to Oct. 24.
The last CPI update for August suggests pricing pressure is picking up, albeit moderately so far. Headline consumer inflation rose 2.9% in August, the fastest pace since January. Core CPI also ticked up, rising 3.1% vs. the year-ago level, the highest since February.
Imported prices, by contrast, are posting sharp increases lately, raising concerns that the upside pressure from tariffs could spill over into CPI in the months ahead.
“Most of the [higher] cost [from tariffs] seems to be borne by US firms,” Harvard University professor Alberto Cavallo tells Reuters. “We have seen a gradual pass-through to consumer prices and there’s a clear upward pressure.”
Meanwhile, some analysts predict that the recent slide in Treasury yields is nearing an end.
“We don’t expect long-term yields to fall much further, if at all. 10-year Treasuries can still hold above 4% even as the Fed cuts rates, mainly due to inflation being sticky and the overall resilient economy,” said Collin Martin, fixed income strategist at the Schwab Center for Financial Research.
