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‘Inflation is the biggest enemy of the bond market,’ fixed income expert says - BLOOMBERG
Concerns over fiscal uncertainty and geopolitical instability have an investment analyst wondering how U.S. President Donald Trump’s “big, beautiful bill” will impact the U.S. bond market.
Trump’s bill, passed by the U.S. Congress, will authorize spending hikes on border security and the military, erode Medicare and Medicaid and add trillions to the government’s debt.
“I think there is some concern within the bond market about the long term efficacy of the long end, so to speak, of the U.S. Treasury curve,” Dustin Reid, vice-president and chief strategist of fixed income at Mackenzie, told BNN Bloomberg in a Thursday interview.
The passage of the legislation as the American president continues to call for lower interest rates comes, reportedly considering ways to replace U.S. Federal Reserve Chair Jerome Powell.
An uptick in U.S. inflation, which accelerated in June to 2.7 per cent, has been attributed by some to Trump’s tariffs pushing up the cost of goods, including furniture, clothing, and large appliances.
“I think there’s concerns around potentially some parts of inflation underlying in the economy,” said Reid. “Obviously, what’s happening with tariff related industries could be an issue, and then obviously pressure on the Fed to cut rates when inflation is clearly not coming under control, particularly back to the two per cent target. So that’s definitely a concern for investors in the fixed income (market).”
With the U.S. unemployment rate low and U.S. inflation still above their two per cent target, Fed officials have been reluctant to cut interest rates until it is clear the Trump administration’s tariffs won’t spike prices significantly.
“Inflation is the biggest enemy of the bond market, at least particularly the nominal part of the bond market. If inflation remains high, then that erodes the long-term impact that investors will get from the bond market right from the curb. That’s an issue,” said Reid.
“People in the bond market spend a lot of time watching where inflation is at, and we’ve had, obviously, CPI and PPI data out of the U.S. this week. Though the headline and core on both are relatively tame, relatively friendly, when you kind of strip it back a little bit and you look at some of the industries that have been very significantly tariff related, you are seeing the beginnings, I would stress the beginnings only, of potentially some significant price increases, and that, I think, has some people worried that there could be some erosion in the long end of the bond market in terms of long term yields.”
Trump administration officials argued the “big, beautiful bill” will boost private sector investment and strengthen the U.S. economy. They insist that while tariff increases could result in a one-time bump in prices, they should not drive-up inflation over the longer term.
Nonpartisan forecasters say the bill will add US$3.4 trillion to the country’s $36.2 trillion debt while cutting health benefits and food assistance.
“The Fed has clearly put a marker down, and said that we do expect that tariff related inflation pass through will happen in the June data, which we just got in July, and the July data that we’ll get in August, and maybe even beyond,” Reid said.
“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.‘”
