(Bloomberg) — The US bond market is flashing a warning to President Donald Trump that unleashing tariffs on top trading partners risks fueling inflation and slowing the nation’s economic growth.
Most Read from Bloomberg
His tariff decision — though subsequently delayed Monday in Mexico’s case — drove short-dated Treasury yields higher by as much as eight basis points to 4.28% on anticipation that it will keep interest rates elevated by pushing up consumer prices. But longer-term yields moved in the opposite direction on worries that the economy will stall, narrowing the gap between those on 2- and 30-year bonds by the most since early December.
Subscribe to the Bloomberg Daybreak podcast on Apple, Spotify or anywhere you listen.
While the moves were pared after Trump agreed to temporarily postpone the increases on Mexico to allow for negotiations, the market’s broader direction largely held, showing concerns that a trade war would deal fresh shocks to an otherwise resilient economy.
The risk that higher import prices could rekindle inflation has hovered over markets since Trump’s election in November, dashing any expectations that the Federal Reserve will cut interest rates much further this year. The central bank last month paused the monetary policy easing it started in September and futures are pricing in that it will remain on hold until late this year.
“Risks of stagflation are elevated,” said Jack McIntyre, portfolio manager at Brandywine Global Investment Management referring to the combination of stagnant growth and rising inflation. “Anything growth related needs to be looked at through the lens of uncertainty. Investment might get delayed until we get more clarity.”
Over the weekend, Trump followed through on his threat to impose levies on the exports of Canada, Mexico and China, while reiterating a warning to the European Union that tariffs “will definitely happen.” Goldman Sachs Group Inc. is positioning for the bond market’s current direction to continue, flattening the yield curve. Firms including BNP Paribas SA, Singapore’s DBS Bank Ltd. and Japan’s SMBC Nikko Securities Inc. said this puts the US economy at risk of falling into stagflation.
With gasoline and food not excluded from tariffs, BNP strategists said long-term inflation expectations could keep rising, favoring 10-year inflation-linked Treasuries.
