Inflationary Pressures Set to Persist: Fiscal and Tariff Risks Pushing Rates Higher

Macro risks, fiscal, and tariff issues can push longer tenor rates higher, despite clear upside pressures in the rates market. According to Padhraic Garvey, CFA, policy uncertainty makes it challenging to predict future market trends.

Macro risks, fiscal, and tariff issues are pushing longer tenor rates higher, despite clear upside pressures in the rates market. According to Padhraic Garvey, CFA, policy uncertainty makes it challenging to predict future market trends [1]. The Federal Reserve is expected to cut rates, but tariff-induced inflation and fiscal pressures could pull longer tenor rates higher.

The U.S. is grappling with elevated fiscal deficits and tariff revenues financing tax cuts, which could push inflation towards 4% in the coming months. The Federal Reserve, currently maintaining a moderately tight policy stance, is anticipated to ease policy. However, tariff impacts on inflation remain a significant uncertainty [1].

The South Korean won has weakened amid heightened uncertainty over U.S. trade policy, with tariffs on South Korean exports still pending. South Korea is stepping up diplomatic efforts to prevent punitive measures [2].

Investors are bracing for a return to a highly unpredictable policy environment as the pause on President Donald Trump’s tariffs expires at the beginning of August. Tariffs could have a prolonged drag on economic growth, with real GDP in 2029 projected to be about 1% below pre-April forecasts. Inflation is expected to rise due to tariffs, peaking in 2026 before declining [3].

The European Central Bank (ECB) is also facing upward pressures on long rates, with fiscal pressures building in 2026. The 10-year Bund yield could rise towards 3% due to fiscal pressures and the ECB's policy stance [1].

In conclusion, while the Federal Reserve is expected to cut rates, the elevated fiscal deficit and tariff-induced inflation could pull longer tenor rates higher. Investors should prepare for potential risks and opportunities in the fixed-income market.

References:
[1] https://think.ing.com/articles/rates-upside-pressures-arent-going-away-any-time-soon/
[2] https://www.tradingview.com/news/te_news:468154:0-sk-won-extends-fall-on-us-trade-policy-uncertainty/
[3] https://www.morningstar.com/markets/what-tariffs-could-mean-fixed-income-investors