According to a Reuters survey, bond strategists are reassessing the trend of treasury bond bond yields, believing that the inflation threat related to tariffs may further delay the Fed's interest rate cut. Trump's tariff policies and domestic tax cuts have complicated the Federal Reserve's efforts to reduce inflation, leading investors to demand higher "term premiums" and thus pushing up long-term US bond yields. Most strategists expect that US bond yields will remain stable or rise in the next three months to a year.

1. Tariff Policy and Inflation Threat

Trump's tariff policies and domestic tax reduction plans are exacerbating market concerns about inflation. These policies not only increase costs for businesses, but may also push up consumer prices, making the Federal Reserve's efforts to reduce inflation more complex. Kathy Jones, Chief Fixed Income Strategist at Schwab Center for Financial Research, said, "Without these policy changes, I would have expected inflation to fall and policy rates to normalize. But now the situation has changed and inflation risk has increased

According to a survey conducted from February 6th to 11th, 16 out of 21 respondents (about three-quarters) believe that the risk facing US bond yields in the next three months is more inclined to rise rather than fall. Many strategists point out that Trump's erratic tariff policies further increase this risk.

2. Federal Reserve Policy and Economic Performance

The strong performance of the US economy and the Fed's "not in a hurry" to cut interest rates have completely digested the expectation of only one more rate cut this year in the interest rate futures market. US Treasury Secretary Vincent Besant said that the focus of the White House is to maintain the yield of 10-year treasury bond bonds at a low level, rather than requiring the Federal Reserve to lower the policy interest rate. However, Trump's policy measures, including vague hints about tariffs, are bringing uncertainty to the bond market.

The median estimate of strategists in the survey shows that the 10-year US Treasury yield is expected to remain stable at 4.53% after three months and 4.50% after six months, higher than the 4.40% and 4.35% surveyed last month, respectively. More than half of the respondents have raised their estimates for January.

3. Risk of yield increase

Kathy Jones pointed out, "Our outlook suggests that if not for a longer period of time, the Federal Reserve will at least remain inactive until the June meeting, and US bond yields will remain within a certain range. However, due to the impact of tariffs and fiscal policies, the risk of rising yields is greater than falling, especially in the long run." Lars Mouland, Chief Interest Rate Strategist at Nordic Bank, also emphasized that since the summer of 2022, the market has generally predicted an economic recession and interest rate decline, but US economic growth has been above trend, and these predictions have been proven wrong.

Most respondents in the survey predict that US bond yields will remain stable or rise above current levels at some point in the next three, six, or 12 months. This is in sharp contrast to the prediction made by the majority of respondents in the previous survey that the yield will decline.

4. The Challenge of the Federal Reserve

The main challenge currently facing the Federal Reserve is how to formulate monetary policy against the backdrop of strong economic growth and rising inflationary pressures. Lars Mouland pointed out, "Why does the Federal Reserve cut interest rates? If they cut interest rates too much now, it could fuel the currently running economy." This suggests that the Federal Reserve may maintain interest rate stability for a longer period of time to balance the goals of economic growth and inflation control.

summary

Trump's tariff policies and domestic tax cuts are driving up inflation expectations, leading bond strategists to raise their forecasts for US bond yields. Although the Federal Reserve is currently "not in a hurry" to cut interest rates, inflation risks and strong economic growth make it more likely for yields to rise than fall. In the future, the trend of US bond yields will depend on inflationary pressures, economic growth, and the policy choices of the Federal Reserve.