The US bond market is sending a warning to President Donald Trump that unleashing tariffs on top trading partners risks fueling inflation and slowing the nation’s economic growth. Treasury yields rose by as much as eight basis points due to concerns about elevated consumer prices, but longer-term yields moved in the opposite direction, narrowing the gap between 2- and 30-year bonds.
The market’s concern is that a trade war would deal fresh shocks to an otherwise resilient economy, leading to higher inflation and lower growth. Portfolio managers expect a flatter yield curve and a stronger US dollar. Goldman Sachs is positioning for this trend, flattening the yield curve, which puts the US economy at risk of falling into stagflation.
The Fed has paused interest rate cuts, citing concerns about inflation. While the central bank’s preferred measure of underlying inflation remained muted in December, portfolio managers expect higher import prices to rekindle inflation. The combination of stagnant growth and rising inflation is seen as a significant risk, with some firms positioning for stagflation.
The bond market’s direction is also affecting the stock market, which pulled down on Monday due to inflation pressures and weakening economic growth. Long-dated bonds are advancing, benefiting from the rush into havens. The Fed is expected to keep rates on hold while it judges whether growth or inflation risks are more serious.
Source: https://finance.yahoo.com/news/treasuries-fall-short-end-tariffs-011419526.html