Street Calls of the Week
If you think 30-year US yields at 5% are high, think again.
The bond market seems to be revolting again, and understandably so.
However you cut and slice it, 30-year US yields should rather sit at 5.50% or higher than where they are now.
Why?
The Trump administration is running the following policies:
A) The effective tariff rate will likely settle in the 20% area, and the US Dollar is ~10% weaker on top of that: the inflation risk premium should remain relatively high;
B) We are already running above the Fed target on core inflation, and Trump is likely to appoint a dovish chair and steer the board towards a dovish posture too: the term premium should increase;
C) The US is running 3.6% primary deficits, passed another tax package increasing deficits, and speaker Johnson has signaled we are not done on fiscal
In such an environment, you would expect the premium to own long-end bonds to be quite steep.
The table below shows the measurement of such premiums (30y yields minus the priced-in terminal rate) for different countries, and it also shows the excess core inflation above target and the primary deficit over the last 12 months.
The US curve is not even the steepest of the group, primary deficits are large and set to remain so, and tariff passthrough is a clear inflation risk going forward with core PCE already above target.
The bond market might throw a proper tantrum in summer.
What do you think?
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