The U.S. Treasury market is sending signals of unease! Tariff risks are raising inflation expectations

As news emerges that Trump is pushing for tariffs of 15%-20% on EU goods, the U.S. bond market is quietly signaling unease. Recently, several market-based future inflation indicators have been rapidly rising, indicating that investor concerns about a new round of "tariff-driven inflation" are intensifying.

According to the Zhitong Finance APP, on Friday, the inflation expectation indicator in the U.S. bond market, the breakeven inflation rate, showed a significant increase. Data shows that the 5-year breakeven inflation rate rose 4 basis points to 2.53%, the highest level since February, and above the 2.5% warning line that the market typically views as "upside inflation risk."

The 10-year and 30-year breakeven inflation rates also saw a slight increase. FactSet data shows that as of Friday, the 10-year breakeven inflation rate rose to 2.43%, while the 30-year rate increased to 2.37%. Meanwhile, although inflation expectations are climbing, the nominal yields on 10-year and 30-year U.S. Treasuries fell to 4.43% and just below 5%, respectively, indicating that investors are weighing inflation risks while also anticipating a potential slowdown in future economic growth.

Foreign media cited three sources reporting that Trump is pushing for new tariffs of at least 15% to 20% on goods from the EU. Following the announcement, U.S. stocks fell back, but the decline was not significant.

Adam Turnquist, Chief Technical Strategist at LPL Financial, pointed out that since Trump has been sending tariff letters to major trading partners, the 2-year breakeven inflation rate has been continuously rising, reflecting market concerns about "tariffs leading to price increases."

The breakeven inflation rate is calculated from the yield difference between nominal Treasuries and inflation-protected Treasuries of the same maturity and is widely used as a market-based indicator of future inflation expectations.

Despite some bond market indicators suggesting that inflation risks are resurfacing, there remains uncertainty regarding the Federal Reserve's interest rate expectations. On Thursday, Federal Reserve Governor Christopher Waller stated that he hopes to push for rate cuts at the July meeting. This statement led to a decline in U.S. Treasury yields across the board on Friday.

The key question now is whether this round of "tariff inflation" is merely a temporary price fluctuation or will transform into long-term structural inflationary pressure. If inflation proves to be persistent, the Federal Reserve may not be able to enter a rate-cutting cycle quickly; however, if it is just a short-term shock, combined with a weak labor market and slowing economic growth, it may actually favor the market's expectations for rate cuts in 2025.

BMO Capital Markets strategists Ian Lyngen and Vail Hartman wrote in a report released on Friday: "The market will continue to be overshadowed by 're-inflation anxiety' this summer, until the CPI data is released in September or even October."

The two strategists noted that two uncertainties will determine whether the Federal Reserve will initiate rate cuts this year: first, whether a stock market rebound can effectively stimulate the "wealth effect," thereby encouraging higher-income groups to consume against inflation. Second, whether Trump's potential immigration policies will create a new shortage in the low-skill, low-wage labor market, which could trigger unexpected wage increases under the influence of tariffs Despite the aforementioned inflation concerns, the overall response of the U.S. stock market has been relatively mild. As of Friday, the S&P 500 index was nearly flat at 6,297.36 points, close to its historical high; the Nasdaq index rose by 0.05%, achieving its 11th closing high of the year at 20,895.66 points; the Dow Jones index fell by more than 100 points, closing at 44,342.19 points;

In the bond market, the yield on the 2-year U.S. Treasury fell to 3.88%, and the 10-year yield dropped to 4.421%, both reaching their lowest levels of the year