By Vivien Lou Chen
The 5-year breakeven inflation rate rose above the 2.5% mark that tends to signal fear of a more sustained upside inflation risk
A critical corner of the U.S. bond market isn’t looking very calm about tariff risks.
Some market-based measures of future inflation have been rising back toward worrisome levels, with some strategists pointing to the potential for another round of unsettling tariff-driven price gains in the months to come.
On Friday, breakeven inflation rates that reflect expectations of future long-run price gains climbed back to levels not seen since February or April, the latter of which was when fears over President Donald Trump’s tariff plans against the U.S.’s major trading partners reached a peak.
The 5-year breakeven inflation rate, for instance, was up 4 basis points at 2.53%, according to FactSet. That’s above the 2.5% mark that tends to signal fear of a more sustained upside inflation risk. Ten- and 30-year breakeven inflation rates also edged higher.These rising inflation expectations were occurring even before the Financial Times reported that Trump was pushing for a minimum 15%-20% tariff on goods from the European Union, citing three people briefed on the talks. Stocks moved lower soon after the report.
Meanwhile, Treasury yields, which also reflect traders’ outlook on future inflation, fell on Friday as market participants weighed remarks made one day earlier by Federal Reserve Gov. Christopher Waller, who said he wants to make the case for an interest-rate cut later this month. At issue now is whether a looming round of tariff-driven inflation might end up being short-lived or long-lasting. A persistent spell of inflation, or at least the risk of one, would theoretically keep the Federal Reserve from cutting rates anytime soon. But a temporary spike in prices that’s offset by a weaker labor market and slower economic growth would give greater credence to 2025 rate-cut expectations. “Reflationary angst will undoubtedly be running high throughout the summer months and most likely until the September (or even October) inflation figures have been released,” said BMO Capital Markets strategists Ian Lyngen and Vail Hartman.In a note on Friday, they mentioned two wildcards that will likely determine if central-bank officials will be comfortable lowering rates this year. One is whether the recent rebound in equity valuations will be “sufficient to revive the wealth effect and leave the upper quartile with motivation to chase inflation,” they wrote. The other is whether the Trump administration’s immigration policies will “result in a fresh round of labor scarcity for the low-skilled, low-wage sector and trigger an unanticipated reacceleration of nominal wages” at the precise moment tariffs are working through the economy.Stock and bond investors have largely managed to look past the worst possible potential impacts of tariffs. On Friday, the S&P 500 SPX ended flat and not far from its record closing level of 6,297.36 reached in the previous session. Meanwhile, the Nasdaq Composite COMP shook off earlier weakness to eke out its 11th record close of the year at 20,895.66, and the Dow Jones Industrial Average DJIA fell more than 100 points to 44,342.19. Separately, 2- BX:TMUBMUSD02Y and 10-year Treasury yields BX:TMUBMUSD10Y dropped on Friday and remained lower overall for the year.Earlier this week, Adam Turnquist, chief technical strategist for LPL Financial in Charlotte, said in a note that the 2-year breakeven inflation rate has been climbing ever since Trump sent a barrage of tariff letters to the U.S.’s major trading partners. Breakeven inflation rates are derived from the difference between yields on a nominal Treasury and a Treasury inflation-protected security of the same duration.
As of Friday, the 10-year breakeven inflation rate was up 2 basis points at 2.43%, and its 30-year counterpart was up by a similar magnitude at 2.37%, according to FactSet – even though yields on nominal 10- and 30-year Treasurys fell to 4.43% and just below 5%, respectively.
-Vivien Lou Chen
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07-18-25 1610ET
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