Tariffs + Inflation Shadows Persist, US Treasury Yields Trapped in a "Seesaw Battle"

According to the Zhitong Finance APP, U.S. Treasury Secretary Scott Pruitt stated last week that President Donald Trump’s focus on lowering borrowing costs is on the 10-year U.S. Treasury yield rather than the Federal Reserve's benchmark short-term interest rate. However, three weeks into Trump's second presidential term, there is little expectation that yields will decline further in the short term.

Last Friday, the monthly employment report showed steady job growth in January, with wage growth exceeding expectations, leading to a rise in yields once again. Americans seem to be preparing for the cost increases in goods driven by Trump's tariffs: according to a survey by the University of Michigan, consumers expect inflation to exceed 4% over the next year, more than double the Federal Reserve's target level.

Bond traders expect yields to remain elevated and fluctuate within a range until the U.S. economy becomes clearer.

Priya Misra, a portfolio manager at JP Morgan Asset Management, stated, "The employment report indicates that the labor market is resilient, so there is no pressure for the Federal Reserve to cut rates."

The 10-year U.S. Treasury yield hovers around 4.5%.

The benchmark 10-year U.S. Treasury yield (a key benchmark for measuring consumer and business loan costs, highly dependent on long-term outlook) has retreated from its early January highs but remains nearly a percentage point higher than levels seen in mid-September last year, when traders began preparing for the pressures on U.S. Treasury prices from tariffs, tax cuts, and rising debt. While economic growth is strong, inflation is declining slowly, and the Federal Reserve paused rate cuts last month, with futures traders expecting the Fed to keep rates unchanged until at least September.

Last week, the U.S. Treasury maintained stability in quarterly bill and bond auctions and indicated that there would be no changes for at least the next few quarters, alleviating market concerns about U.S. Treasury supply.

However, analysts remain cautious, as Trump's sudden departure from former President Biden's policies brings significant uncertainty to the outlook, particularly with his tariff threats. Meanwhile, it remains unclear to what extent Trump will seek tax cuts and what impact this will have on the size of the government's deficit.

Ed Hussain, a global rates strategist at Columbia Threadneedle, stated, "The environment we are in is not suitable for making big bets."

Bloomberg macro strategist Simon White noted, "Pruitt mentioned in an interview last Wednesday that Trump will focus on keeping the 10-year yield below the policy rate... Unfortunately, for the Trump administration and Pruitt, the goal of lowering the 10-year U.S. Treasury yield may conflict with another White House goal—reducing the trade deficit. This could ultimately lead to higher yields."

This week, the focus will shift to the U.S. 10-year and 30-year Treasury auctions that measure market demand, as well as Federal Reserve Chairman Jerome Powell's testimony before Congress on Tuesday and Wednesday The U.S. Department of Labor will also release the Consumer Price Index on Wednesday. This data may reinforce the recent outlook: economists expect prices to rise 2.9% year-on-year in January, the same increase as last month