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Investing.com - The U.S. fiscal outlook has "materially improved" thanks to higher tariff revenues and the start of a new Federal Reserve easing cycle, bolstering expectations for long-dated U.S. Treasury yields to decline, according to analysts at Barclays.
In a note, the bank flagged that, despite worries earlier this year about the U.S. government bond market following the passage of President Donald Trump’s signature budget bill, the segment has been "notably resilient."
Since mid-May, 30-year Treasury yields have dropped "meaningfully," the analysts said, even as yields have risen elsewhere. Yields tend to move inversely to prices.
Still, markets have not yet adjusted to "fully reflect" key developments in the U.S. fiscal outlook, notably an "improved debt trajectory" driven partially by higher tariff revenues, the analysts said.
Customs duties have surged to $30 billion a month and could rise further if the effective tariff rate -- which has been pushed up by Trump’s sweeping import levies on a host of countries -- climbs from its already-elevated level of 11%, they said. However, they added that markets appear to be "hair-cutting tariff revenues" because of ongoing risks that the duties could be struck down by the Supreme Court later this year.
Falling U.S. interest rates could also factor into a shrinking government budget deficit, the analysts argued. A drop in borrowing costs can indirectly impact the federal shortfall by lowering the interest the government pays on newly-issued debt.
The consensus median forecast for the budget deficit stands at around 6.5% of gross domestic product in 2026 and 2027, Bloomberg and Barclays research showed. But the bank said a figure of 6% of GDP "seems more likely," while there is a risk of even smaller deficit should the Fed slash rates by more than anticipated.
"We believe that consensus has not internalized the interest rate channel for reducing budget deficits," the Barclays analysts wrote.
Last week, the Fed cut interest rates by 25 basis points and laid out fresh projections which showed that many officials are anticipating another half percentage point in reductions to help stem a downturn in the labor market.
Against this backdrop, the analysts reiterated their expectation for 30-year U.S. Treasury yield to fall to 4.5%. On Tuesday, the bond yield was last at 4.748%.