Fannie Mae, Freddie Mac shares tumble after conservatorship comments
As reported yesterday at CapitalSpectator.com, the bond market is showing a degree of resiliency despite tariff-related inflation risk. Leading the resiliency this year: medium-term corporate bonds, based on a set of ETFs tracking various types of US fixed income securities through Tuesday’s close (July 22).
Vanguard Intermediate Corporate Bond ETF (NASDAQ:VCIT) is this year’s top performer with a 5.4% year-to-date advance. That 2025 increase is just slightly ahead of the second-best bond market performer this year: inflation-indexed Treasuries (TIP).
Notably, all the major bond sectors are posting gains so far this year. The weakest performer: long-term Treasuries (TLT) with a 1.2% year-to-date rise.
What accounts for the runup in bond prices this year? One narrative is that Wall Street’s fears are fading that Trump’s tariffs will spawn materially higher inflation.
Yet some analysis suggests that it’s premature to wave the all-clear flag. The Yale Budget Lab this week, for instance, writes: “Current Tariff Rate: Consumers face an overall average effective tariff rate of 20.6%, the highest since 1910. After consumption shifts, the average tariff rate will be 19.7%, the highest since 1933.”
The implication: Higher inflation is coming, even if the effects have yet to show up in the official statistics.
“We’re seeing the opening stages of these tariff effects taking place,” says Jason Miller, a professor of supply chain management at Michigan State University.
Higher inflation, of course, would be a headwind for bonds by reducing the after-inflation value of a fixed payout rate, a risk that’s being discounted at the moment.
A possible counterpoint to the view that the bond market is shrugging off tariff inflation risk is the rally in inflation-indexed Treasuries. As the second-strongest performer this year for bonds, the iShares TIPS Bond ETF (NYSE:TIP) suggests that complacency about tariff inflation may be misplaced after all.
“Inflation still hasn’t been impacted by these tariffs, which has surprised a lot of people,” notes Neel Mukherjee, chief investment officer at TIAA Wealth Management. “But the Fed is focused on inflation because they’re worried about goods inflation. And that will accelerate.”
For the moment, inflation-indexed Treasuries agree that it’s too soon to dismiss inflation risk as yesterday’s news.
Keep in mind that there’s another factor that may support bond prices: concerns of economic slowdown. Perhaps expectations that softer growth (or worse?) is the bigger risk vs. inflation, in which case demand is rising for safe-haven bonds.
In turn, some analysts see stagflation brewing — slower growth and higher inflation, which could explain why bonds writ large and inflation-indexed Treasuries are rallying at the same time. Michael Hicks, professor of economics at Ball (NYSE:BALL) State University, explains:
“In the two months of data since Trump’s Liberation Day tariffs were announced, the United States has lost 14,000 factory jobs. The slowdown in the economy this year follows a pattern that is nearly a precise example of what economic explanations of tariffs have predicted for a half-century. The price increases due to tariffs are not technically inflation. Economists have a name for rising prices during a weak economy: stagflation. It’s what made the 1970s so miserable.”