The US bond market is sending worrying signals! Tariff risks are pushing up inflation expectations.

With the news of Trump pushing for tariffs of 15-20% on EU goods coming to light, the US bond market is quietly sending out signals of unease. In recent days, several market-based future inflation indicators are rapidly rising, showing that investors' concerns about a new round of "tariff-driven inflation" are escalating. On Friday, inflation expectations indicators in the US bond market 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% threshold that is typically seen as the "inflationary risk" level. The 10-year and 30-year breakeven inflation rates also saw slight increases. 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, even as inflation expectations rose, the nominal yields on 10-year and 30-year US bonds fell to 4.43% and close to below 5%, respectively, indicating that investors are weighing inflation risks while also anticipating a possible slowdown in future economic growth. According to reports citing three sources, Trump is pushing for new tariffs of at least 15% to 20% on goods from the EU. Following the announcement of this news, US stocks immediately fell, but not by a large margin. Adam Turnquist, Chief Technical Strategist at LPL Financial, pointed out that since Trump began sending out tariff letters to major trading partners, the 2-year breakeven inflation rate has been steadily climbing, reflecting the market's real concerns about "tariffs leading to price increases." The breakeven inflation rate is calculated based on the yield spread between nominal government bonds and inflation-protected government bonds of the same maturity, and is widely used as a market indicator for future inflation expectations. While some bond market indicators suggest the resurgence of inflation risks, on the other hand, there is still uncertainty about the Fed's rate expectations. On Thursday, Fed Governor Christopher Waller stated that he would push for a rate cut at the July meeting. This statement led to a decline in US bond yields on Friday. The key question now is whether this round of "tariff inflation" will be a temporary price fluctuation or will it long-term structural inflationary pressure. If inflation persists, the Fed may not be able to quickly enter a rate-cut cycle; however, if it is just a short-term shock, coupled with a weak labor market and a slowdown in economic growth, it could actually help fulfill the market's expectations of rate cuts in 2025. In a report released on Friday, Ian Lyngen and Vail Hartman, strategists at BMO Capital Markets, wrote: "The market will continue to be overshadowed by 'reinflation anxiety' this summer until the CPI data is released in September or even October." The two strategists pointed out that two uncertain factors will determine whether the Fed will launch rate cuts this year: first, whether the stock market rebound can effectively stimulate the "wealth effect" and drive the willingness of upper-income groups to consume against inflation, and second, whether Trump's potential immigration policies will lead to a new shortage of low-skilled, low-paid labor in the labor market and trigger unexpected wage increases under the influence of tariffs. Despite the inflation concerns mentioned above, the overall reaction in the US stock market has been relatively mild. As of Friday, the S&P 500 index remained almost flat at 6297.36 points, close to a historic high; the Nasdaq index rose by 0.05% to achieve its 11th intraday high of the year, closing at 20,895.66 points; the Dow Jones index fell by over 100 points to 44,342.19 points. In the bond market, the yields on 2-year US bonds fell to 3.88% and the yields on 10-year bonds fell to 4.421%, both reaching their lows for the year.