Bond Market Inflation Gauge Pressured Over Trump Tariff Turmoil

February 10, 2025

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(Bloomberg) — Bond investors are betting that the Federal Reserve will have to contend with rising prices once again, and soon, in the wake of President Donald Trump’s plan to slap tariffs on trading partners and some industrial sectors.

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Short-term inflation expectations are rising above longer-term ones for the widest gap in two years. The so-called five-year breakeven rate, which tracks the yield differences between Treasuries and inflation-linked bonds, reached 2.64% Monday, 27 basis points higher than the 30-year gauge, and marking the biggest difference between the two since 2023.

Historically, 30-year inflation expectations typically trade above short-term gauges because usually there is more uncertainty over how consumer prices will move over a longer period of time. But as Trump unleashed a series of tariff threats that rattled markets the inflation risk premium for shorter-dated securities has steadily increased.

On Sunday, the US president said that he plans to levy 25% tariffs on all US imports of steel and aluminum without saying when. He also said he would announce reciprocal tariffs this week on countries that tax US imports, without giving specifics. Since he took office he has announced, then paused, planned tariffs on Canada and Mexico, while proceeding with a 10% levy on all shipments from China.

The move in breakevens suggests that “tariffs would have a near-term price shock, but shouldn’t unanchor long-term inflation expectations,” said Steven Zeng, an interest-rate strategist at Deutsche Bank AG.

The five-year breakeven curve peaked at 3.8% in March 2022 when the Federal Reserve started to raise interest rates aggressively to curb inflation spurred by pandemic supply shortages.

As recently as October, the five-year breakeven rate was on-par with the longer-term rate. But the short-term gauge has since steadily increased, suggesting demand for near-term inflation hedges after Trump’s return to the White House.