US | Are markets underestimating the risks of tariff-related inflation?

Summary

Mid- and long-term Treasury yields have pulled back from last month’s highs amid soft inflation prints and dovish signals from Fed officials like Bowman and Waller, who have voiced support for a July rate cut.

Key points

• Key points:
• Last week’s updated SEP showed the median FOMC participant still expects two rate cuts before year-end, but Fed officials are increasingly split on where rates will end up.
• The parallel downward shift of the yield curve in the past month likely reflects the market dissent on the need to extend the pause amid the lack of evidence showing tariff impact on prices.
• Market volatility from early April remains contained, yet new outbreaks are not ruled out amid geopolitical risks and the end of the 90-day pause on reciprocal tariffs in a couple of weeks.
• The absence of signs that the U.S. is set to address debt sustainability is likely contributing to the c. 50bp spread between 10-year and 30-year Treasury yields.
• The historical disconnect between rate levels and the U.S. dollar persists, but a sudden loss of the exorbitant privilege seems unlikely, as domestic investors hold most of U.S. debt.

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