Yielding to Reality: The Bond Market Rejects Tariff Optimism and Wall Street Euphoria

By the Curmudgeon

Despite all the headline news that should be sending U.S. government bond prices higher and yields lower (U.S.-China trade deal with much lower tariffs, declining inflation, weakening economy, stronger U.S. $, etc.), U.S. Treasury notes and bond yields have risen rather than fallen!

Today, the 10-Year U.S. note yield closed at 4.47%, the 30-year at 4.89%. The iShares 20+ Year Treasury Bond ETF (TLT) closed at 86.24 (-0.93%) which is way below its 2025 YTD high of 94.09 on April 4^th when stocks cratered after Trump’s April 2^nd Liberation Day tariff announcement.

In particular, lower tariffs will result in lower prices of goods made in China, which will put a lid on inflation and likely lower inflation expectations. All BULLISH for U.S. bonds. So why are bond prices declining and yields rising?

1. Term Premium has increased. While economists and analysts believe that inflation and interest rates will subside in the coming years, President Trump’s mercurial approach to trade policy has made investors them less sure about those forecasts.

2. As a result, they are demanding more yield for the risk of holding U.S. Treasury’s for a longer period—a form of additional compensation known as “Term Premium.” It represents the additional return investors demand for holding longer-term bonds compared to rolling over shorter-term securities. That extra yield represents compensation for the risk associated with interest rate changes over the bond's lifespan.

A graph showing a line of green and black lines

AI-generated content may be incorrect.

“It will be difficult to undo the reset in term premia,” analysts at Goldman Sachs wrote in a recent report. “The underlying macro uncertainty…likely won’t simply resolve with shifts in rhetoric.”

3. Investors are also reluctant to buy longer-term U.S. Treasury’s because of concerns about the growing supply of bonds needed to fund the skyrocketing U.S. federal budget deficit. The U.S. government has over $9 trillion in debt maturing within the next 12 months so the U.S. Treasury auctions will be flooding the market while the pool of natural buyers is shrinking. Such a supply/demand imbalance almost always leads to lower prices.

4. The big foreign buyers - China and Japan - are stepping back or demanding much higher compensation for holding U.S. debt. It was rumored that both countries were selling U.S. government bonds last month.

5. There’s no marginal buyer for long-term Treasuries at lower yields. For now, the Fed is pursuing QT - NOT - QE; pension funds and insurance companies are strapped for cash, and commercial banks are already overexposed to interest rate risk after the 2023 regional banking crisis.

6. With the Fed on hold, there’s no need to “lock-in” higher long-term yields since short term yields are still relatively high and will likely remain so for quite some time. The Curmudgeon is buying a 1-year T-bill tomorrow at ~4%. Shorter term T-bills yield even higher.

Fed Chair Jerome Powell repeatedly said last week that the U.S. central bank wasn’t in a rush to lower rates, citing still solid economic data but also risks that inflation could climb again.

….………………………………………………………………………………….

U.S. Treasury Secretary Scott Bessent has publicly stated that he and the Trump administration are focused on lowering the 10-year Treasury yield. This focus stems from a belief that lower borrowing costs, as reflected in the 10-year yield, are beneficial for the overall economy. That’s especially true for the housing industry where the mortgage rate is largely based on the 10-year yield.

Well, it seems that Bessent has lost a lot of credibility with the 10-year yield rising rather than falling in the last few weeks. And that’s despite all the good news on tariffs/trade deals with the UK and China, a firming dollar and lower inflation prints.

Conclusions:

The U.S. bond market simply doesn’t believe the U.S. can finance its record budget and trade deficits without either higher yields or stealth financial repression.

When the bond market demands higher yields even as inflation falls, it’s not about the inflation cycle. Instead, it’s about the sustainability of U.S. debt issuance itself.

Higher rates create a self-reinforcing spiral: Higher rates → Higher debt service costs → More debt issuance → Even higher rates.

Could the U.S. be on the verge of a sovereign debt crisis, where the Fed will be forced to buy U.S. bonds? If so, the dollar will sharply decline and Victor’s hyper-inflation forecast of 12 years ago will be realized.

….………………………………………………………………………

Good health, success, good luck and till next time………………………………………

The Curmudgeon
ajwdct@gmail.com

Follow the Curmudgeon on Twitter @ajwdct247

Curmudgeon is a retired investment professional. He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996. He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.

Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1971) to profit in the ever-changing and arcane world of markets, economies, and government policies. Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.

Readers are PROHIBITED from duplicating, copying, or reproducing article(s) written by The Curmudgeon and Victor Sperandeo without providing the URL of the original posted article(s).