January 27, 2025
Is the Bond Market Worried About Inflation?
Lawrence Gillum, CFA, Chief Fixed Income Strategist, LPL Financial
The Federal Reserve (Fed) cut interest rates last September and, to date, the central bank has lowered rates by 1%. But over the same period, long-term Treasury yields are higher by 1% (per the 10-year Treasury yield). Does that mean bond investors are worried about inflationary pressures reigniting, particularly with tariffs and a pro-growth policy agenda under the new Trump presidency? Not yet at least. The bond market is expecting inflationary pressures to be higher than the low inflation regime experienced pre-COVID-19, but inflation expectations are not necessarily unanchored, which is good news for the Fed. And for those investors worried that inflationary pressures could reignite, Treasury Inflation-Protected Securities (TIPS) could be a good addition to portfolios to hedge potential inflation shocks.
