Persistent high inflation in the United States is tempering expectations for a swift return to Federal Reserve easing, as traders remain cautious about the potential for future interest rate cuts. Despite a slowdown in inflation since early 2024, the three-month annualized supercore inflation remains above 3%, indicating ongoing price pressures. This environment has led to increased interest in longer-dated US bonds, perceived as undervalued, as traders use recent CPI data as a rationale for purchases. However, the implications of these moves may be overstated, given the potential inflationary pressures from tariffs on imported goods.
The risk of tariffs contributing to inflationary pressures is significant, as they can lead to higher costs for imported goods, potentially resulting in increased overall price levels. Companies may initially absorb these costs, impacting profit margins, before eventually passing them on to consumers. Additionally, retaliatory tariffs could exacerbate trade tensions, affecting exchange rates and economic growth prospects.
The 10-year Treasury yield has decreased to 4.66% as of 11:11 on January 15, down from its last close of 4.79%. This decline reflects the market's response to persistent inflation concerns and the perceived undervaluation of longer-dated bonds amid ongoing economic uncertainties.