A Rise in Bond Yields is Attributed to Traders' Interest in Tariff Developments

U.S. government bond yields saw minimal movement Friday morning following the release of December’s inflation data, which aligned with market expectations.

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Treasury Yield Movements

• The yield on the 2-year Treasury note stood at 4.199%, barely changing from 4.198% the previous day.
• The 10-year Treasury yield dipped slightly to 4.509%, down less than a basis point from 4.515% on Thursday.
• The 30-year Treasury yield slipped to 4.757%, compared to 4.761% the prior day.

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Since bond yields and prices move in opposite directions, the muted yield shifts indicate that market sentiment remained largely unchanged after the economic data release.

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On Friday, new data revealed that inflation, as measured by the Federal Reserve’s preferred gauge, picked up in December but remained in line with economist forecasts. The Personal Consumption Expenditures (PCE) price index rose 0.3%, marking its largest increase since April. Over the past year, inflation climbed to 2.6%, reaching a seven-month high.

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A closer look at the numbers provided a more favorable outlook. The core PCE price index, which excludes volatile food and energy prices and is closely watched by the Fed, increased by 0.2% for the month. The annual core inflation rate held steady at 2.8%, suggesting inflation pressures may be stabilizing.

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Beyond inflation data, investors were closely monitoring developments surrounding potential U.S. tariffs on Canada and Mexico. The White House had imposed a Saturday deadline to decide whether to enforce 25% tariffs on goods from its North American trade partners.

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Reports from The Wall Street Journal suggested that President Trump’s administration was exploring alternative options, including more targeted tariffs, rather than a broad-based implementation. Market participants remained cautious, as trade policy shifts could impact inflationary pressures and global economic conditions.

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David Alcaly, lead macroeconomic strategist at Lazard Asset Management, emphasized that the current trend of disinflation—a slowing pace of inflation—remains intact. He suggested that concerns over recent inflation fluctuations may be overstated, as they are driven more by potential policy shifts, such as tariffs, rather than underlying economic fundamentals.

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Disinflation continues and should persist given broader trends. The recent volatility in inflation is more about the possibility of inflationary policy changes like tariffs rather than existing economic conditions,” Alcaly stated.

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With inflation data meeting expectations and Treasury yields largely unchanged, investors are now focused on the Federal Reserve’s next steps. Policymakers will assess whether inflation remains on track to ease toward their 2% target, which could influence future decisions on interest rates.

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Additionally, the looming tariff decision could introduce new risks, potentially leading to market volatility if trade tensions escalate. For now, the bond market remains steady, reflecting a wait-and-see approach among investors.

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