The factors that caused the inflation surge during the pandemic no longer exist. Many doubt that tariffs will lead to long-term inflation, suggesting that a 10% tariff might not raise inflation to 3%. Policy discussions should focus on the real economy when inflation is close to the target. The Federal Reserve is thought to be approaching its inflation goal.

Market Forces and Long-Term Yields

Market forces determine long-term yields, which have risen partly due to concerns over government fiscal policies. There are no major issues with the sale of government bonds. However, long-term yields have gone up because foreign buyers are feeling anxious. Federal Reserve member Chris Waller mentioned that rate cuts might happen later in 2025. The article discusses a decrease in inflationary pressures that spiked during the pandemic. It suggests that the causes of these price increases—such as supply chain disruptions and excessive government stimulus—have faded. It also downplays the inflation risk from suggested tariffs, indicating that even a broad-based 10% tariff would not significantly raise inflation above current levels. The conversation shifts to how central banks should act when inflation is near their target. In such cases, it’s better to focus on the real economy rather than just inflation numbers. If price increases stay within a preferred range, monetary policy choices—like cutting or raising interest rates—should reflect the strength of the economy instead of short-term fluctuations. Long-term yields mainly respond to investors’ views on fiscal sustainability and public debt levels. These yields have increased partly due to rising concerns about government financial management. The recent rise is not linked to issues with selling government bonds; instead, it indicates the caution of foreign investors monitoring fiscal developments carefully.

Implications for Interest Rate Strategies

Waller’s suggestion of potential rate cuts later next year gives a timeline. It shows that central bank officials may consider loosening policy if certain conditions are met. This perspective influences the rates market, adding volatility across the middle and long end of the yield curve. For those tracking derivatives—especially interest rate futures and options—this means implied volatility could remain high as opinions shift based on new data or speeches. With bonds responding to macro signals and rate paths not fixed, we need to adjust our strategies weekly. For example, yield curve trades should consider not only the expected level of rates but also how the market anticipates changes over time. This combination of slowly falling inflation, ongoing fiscal worries, and changing central bank messages creates a short-term environment where price movements may overreact to small shifts in guidance or data. It underscores the importance of liquidity in execution, especially with fewer solid expectations for rates as the year ends. More defensive strategies, tighter stops, and a reevaluation of carry trades should be part of our weekly plan. Create your live VT Markets account and start trading now.

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