Bond Yields Are Steady Ahead of a Looming Testimony From Powell and a CPI Data

Yields on U.S. government bonds remained within a narrow range overnight and into Monday morning, showing little reaction despite President Donald Trump’s announcement of plans to impose 25% tariffs on imported steel and aluminum. Investors appeared to be weighing the potential economic impact of these tariffs while maintaining focus on upcoming key events, including Federal Reserve Chair Jerome Powell’s testimony before Congress.

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Current Treasury Yield Movements

As of Monday morning, the 2-year Treasury yield stood at 4.264%, marking a slight decline of 1.3 basis points from 4.277% on Friday. It’s important to note that bond yields move inversely to their prices.

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Meanwhile, the 10-year Treasury yield was at 4.478%, down by less than 1 basis point compared to its 4.483% level from the previous session. The 30-year Treasury yield held nearly flat, edging slightly to 4.685% from 4.688% on Friday.

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This relatively muted movement suggests that investors are cautiously watching for further developments, balancing concerns about potential trade disruptions against other macroeconomic factors.

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What’s Influencing the Market?

The stability in yields comes despite President Trump’s decision to expand his tariff strategy. Originally targeting imports from countries like Canada, China, and Mexico, Trump now aims to include a broader range of nations, such as Brazil, Germany, and South Korea, under the proposed steel and aluminum tariffs. This escalation indicates a more aggressive approach to U.S. trade policy, potentially setting the stage for retaliatory measures from affected countries.

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Adding to the mix, the administration is preparing to introduce what’s known as “reciprocal tariffs” later this week. This policy aims to address trade imbalances by matching the tariffs that other countries impose on U.S. goods. In essence, if another country charges the U.S. higher import duties, the U.S. will respond with equivalent tariffs.

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Despite the potential implications of these policies, the bond market has shown limited reaction. According to strategists at BMO Capital Markets, the lack of significant movement in Treasury yields is somewhat counterintuitive. Typically, news of escalating trade tensions might trigger a flight to safety, pushing bond prices higher and yields lower. However, this hasn’t been the case, possibly because investors had already factored in the possibility of such trade measures following Trump’s earlier campaign rhetoric and policy discussions.

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Gregory Faranello, head of U.S. rates trading and strategy at AmeriVet Securities, echoed this sentiment. In a note to clients, he stated, “More tariffs are on the way—first with aluminum and steel, and then reciprocity with Europe.” He emphasized that these initiatives are not new concepts, as they’ve been part of Trump’s agenda since his campaign days and have been discussed for several months.

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Key Events on the Horizon

While trade tensions are certainly on the radar, investors are also bracing for a busy economic calendar this week, which could have a more pronounced effect on Treasury yields.

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Federal Reserve Chair Jerome Powell’s Testimony:
On Tuesday, Powell will begin his semiannual testimony before Congress, an event that typically garners significant attention from market participants. His remarks could provide insights into the Fed’s outlook on inflation, interest rates, and the broader economy. Any signals about potential shifts in monetary policy could influence bond yields, especially if he hints at a more aggressive stance on rate hikes.

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Consumer Price Index (CPI) Report:
Scheduled for release on Wednesday, the January CPI report will offer fresh data on inflation trends. Inflation is a key driver of bond yields, as higher inflation generally leads to expectations of rising interest rates, which can push yields higher. Investors will closely analyze the report to gauge whether inflationary pressures are accelerating or moderating.

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Given these upcoming events, the bond market’s restrained reaction to tariff news may reflect a broader focus on domestic economic indicators and Federal Reserve policy.

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Why the Market Reaction Is Muted

Several factors could explain why Treasury yields have remained relatively stable despite the potential for increased trade tensions:

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Trade Policy Expectations Already Priced In:
Since Trump’s trade agenda has been a consistent theme throughout his presidency, markets may have already anticipated these moves. The element of surprise is often what drives sharp market reactions, and in this case, the tariffs align with previously stated policy goals.

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Focus on Monetary Policy:
With Powell’s testimony and key inflation data on the horizon, investors may be holding off on major moves until they gain clarity on the Federal Reserve’s policy direction. The Fed’s response to inflation and economic growth typically has a more direct and sustained impact on bond yields compared to short-term trade developments.

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Global Economic Conditions:
Despite the tariff headlines, broader global economic conditions remain a key driver of Treasury yields. Ongoing concerns about global growth, geopolitical risks, and central bank policies in other major economies continue to influence demand for U.S. government debt.

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As the week progresses, bond market activity may pick up depending on the outcomes of Powell’s testimony and the CPI report. If Powell adopts a hawkish tone, signaling a readiness to maintain or even accelerate interest rate hikes, yields could rise. Conversely, if the CPI report shows signs of easing inflation, it might reinforce expectations that the Fed will take a more cautious approach, potentially putting downward pressure on yields.

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In the meantime, investors will continue to monitor trade developments, though the current sentiment suggests that the market has become somewhat desensitized to tariff-related news unless it signals a significant escalation.

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