Treasury Market Faces Potential ”Hissy-Fit” as Inflation, Tariff Revenue, and Fed policy Converge
WASHINGTON – Teh U.S. Treasury market is bracing for a possibly volatile period as a confluence of factors – persistent inflation,waning tariff revenues,and potential Federal Reserve rate cuts – threatens to drive up long-term yields. This “triple whammy” scenario mirrors a disruptive pattern seen in late 2024, but with added complexities that could amplify the impact.
Recent inflation reports have signaled trouble,with core services inflation accelerating in the Consumer Price index (CPI),Producer Price Index (PPI),and the Fed’s preferred Personal Consumption Expenditures (PCE) price index. Should this trend continue in upcoming August PPI and CPI releases, the bond market could find itself navigating rate cuts amidst rising inflation – a situation that unfolded between September and December 2024, resulting in a 100-basis-point Fed cut and a simultaneous 118-basis-point surge in the 10-year Treasury yield.
However, this time around, a critical new element is emerging: the potential loss of revenue generated by recently implemented tariffs. These tariff revenues have contributed to suppressing long-term yields by bolstering the supply of new debt. A decline in these revenues would effectively increase the supply of debt, exacerbating upward pressure on yields, particularly if the Fed simultaneously lowers short-term rates in response to economic conditions.
The Treasury market relies on a consistent flow of new debt, and the recent tariff income has helped manage yields. Without this revenue stream, combined with a dovish Fed and accelerating inflation, analysts warn the market could react sharply. This potential instability poses risks to borrowers, investors, and the broader economy.
