There is no shortage of items to worry about for the bond market. From threats to strongarm the Federal Reserve to push lower to projections of a deepening federal budget deficit to the potential for higher from tariffs, risk factors abound. Treasury yields, however, continue to trade in a range.
Let’s start with the , which fell for a fourth straight trading session on Monday, dipping to 4.38%. That’s a middling range for the benchmark yield so far in 2025.
Several measures of market-based inflation expectations are also holding at a middling level after turning lower in recent days. The mid-2% outlook at the moment is only moderately above the Federal Reserve’s 2% target and far below the current Fed funds target rate, which remains at a 4.25%-to-4.50% range.
The calm reaction in the bond market means that investors looking to hedge inflation risk by purchasing inflation-indexed Treasuries (a.k.a. TIPS) are offered lesser real yields of late. The inflation-indexed yield on a 5-year TIPS, for example, fell to 1.46% on Monday (July 21), the lowest in nearly three months.
The bond vigilantes, it seems, have taken a chill pill and remain optimistic that inflation will remain tame for the near term.
The serene state of the bond market could change in a heartbeat, of course, and so it’s premature to declare that threat of higher yields has passed. One date for investors to keep in mind is August 1, when President Trump says he’ll raise tariffs on countries that haven’t negotiated a new trade deal.
Markets appear to be betting that another round of delay may be in the offing.
“We’ll see what the president wants to do,” Treasury Secretary Bessent said on Monday in response to the question of whether Trump will extend the August 1 deadline. “But again, if we somehow boomerang back … I would think that a higher tariff level will put more pressure on those countries to come up with better agreements.”
Meanwhile, the bond market isn’t terribly concerned about tariff inflation. The stock market seems pretty calm, too.
“Equity investors appear to be looking through potential near-term economic and earnings weakness and focusing instead on the prospect for robust growth in 2026,” wrote Goldman Sach’s chief US equity strategist David Kostin.
Slowing growth, on the other hand, may be a factor, in which case the appeal of bonds goes up, which means yields go down. On that score, yesterday’s update of Conference Board Leading Economic Index paints a worrisome outlook, although this may be another false signal. But perhaps the bond market is becoming convinced that slowing growth is the bigger risk factor vs. tariff-based inflation.
“At this point, The Conference Board does not forecast a recession, although economic growth is expected to slow substantially in 2025 compared to 2024,” said Justyna Zabinska-La Monica, senior manager, business cycle indicators, at The Conference Board. “Real is projected to grow by 1.6% this year, with the impact of tariffs becoming more apparent in H2 as consumer spending slows due to higher prices.”
Tariff risk, perhaps, is still resonating, but as a headwind for growth rather than fuel for inflation.