Long-maturity Treasury yields reached the highest levels in a month Thursday as investors demand compensation for the risk that tariffs will spur US inflation.
Though the increases were pared in New York trading after US economic data provided no fresh catalyst for higher yields, the Trump administration’s late-Wednesday announcement of a 25% tariff on foreign-made cars next month saw the 30-year Treasury yield reach 4.75%, the highest level since Feb. 20.
The 30-year exceeded the five-year Treasury yield by more than 63 basis points, the widest gap since early 2022. The spread continued to widen as five-year yields led the retreat, aided by block trades in futures. Shorter-maturity Treasury yields have been curbed by the prospect of Federal Reserve interest-rate cuts later this year in response to signs of slowing US economic growth. Investors increasingly favor the five-year to capture the benefit of Fed rate cuts.
“The tariffs are weighing on the bond market,” said Tom di Galoma, a managing director at Mischler Financial Group. “The supply this week is a also a factor, as well as the coming month- and quarter-end, with some shift during this period back into equities. All of this is affecting bonds.”
An auction of seven-year Treasury notes Thursday drew a yield slightly higher than indicated in trading just before the bidding deadline, a sign that demand fell short of expectations.
BMO Capital Markets strategist Vail Hartman before the sale said demand was likely to be soft because of “the rise in volatility and uncertainty amid the escalation of the trade war.”
Meanwhile, steep declines for US equity benchmarks in March may cause month-end buying, funded by sales of bonds.
The prospect that US fiscal policy could widen the deficit in coming years also has put upward pressure on long-maturity Treasury yields.
Economists at KBC Group said in a note that there appears to be a “debate” at the Fed about Chair Jerome Powell’s recent assessment that inflation resulting from tariffs will be temporary. They cited St. Louis Fed President Alberto Musalem’s comments Wednesday that inflation could stall above the Fed’s 2% goal or even accelerate.
“The Fed’s priority remains inflation until growth is visibly weakening,” the KBC team including Peter Wuyts said. Short-maturity yields are limited by expectations for eventual rate cuts, but “the long end remains more vulnerable for how the explosive policy mix could backfire to the US economy.”
Swaps traders are pricing in two quarter-point rate cuts by the end of 2025, the first one in July. Earlier this year they priced in three.
Further obscuring the fiscal backdrop is the US debt limit, which needs to be lifted or suspended for spending obligations including debt service to be met. The Congressional Budget Office said Wednesday the federal government could run out of enough money as soon as August.
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