Trump’s spending bill sparks concern over long-term bond returns and Federal Reserve direction
Rising inflation in the United States, driven in part by tariffs and a new federal spending bill, is raising alarms among bond market analysts concerned about long-term yields and investor returns.
Inflation accelerated to 2.7 percent in June, with cost increases tied to goods such as furniture, clothing, and large appliances.
BNN Bloomberg reported that some analysts have attributed this to tariff-related pressures stemming from US President Donald Trump’s economic policies.
Dustin Reid, vice-president and chief strategist of fixed income at Mackenzie, said investors are paying close attention to how these inflationary pressures could affect returns across the Treasury curve.
“There is some concern within the bond market about the long term efficacy of the long end, so to speak, of the US Treasury curve,” he said.
Trump’s “big, beautiful bill,” passed by the US Congress, authorizes spending hikes on military and border security, while cutting funding for Medicare, Medicaid, and food assistance programs.
The bill is expected to add US$3.4tn to the country’s existing US$36.2tn debt, according to nonpartisan forecasts.
Fed officials remain reluctant to cut interest rates amid strong US job numbers and inflation still above the two percent target.
Reid said there’s concern among fixed income investors about “pressure on the Fed to cut rates when inflation is clearly not coming under control.”
He added that inflation poses a major risk, calling it “the biggest enemy of the bond market, at least particularly the nominal part of the bond market.”
If inflation stays elevated, he said, “that erodes the long-term impact that investors will get from the bond market right from the curb.”
Reid noted that while recent CPI and PPI data may look mild on the surface, a closer look reveals early signs of price increases in “some of the industries that have been very significantly tariff related.”
He said this has raised concerns among some that “there could be some erosion in the long end of the bond market in terms of long term yields.”
Trump administration officials argue the bill will strengthen the US economy by encouraging private sector investment. They maintain that tariff-related price increases are temporary and not expected to result in sustained inflation.
Reid said the US Federal Reserve has already factored in inflation pass-through from tariffs, with early signs expected in the June data and potentially extending into the months ahead.
“I think the market is looking at that and saying, ‘Okay, well, the Fed may have some beginnings of what it believes will be tariff related inflation pass through here,’” he said.
