US Treasury yields dropped Tuesday ahead of a key June inflation report

US Treasury yields dropped Tuesday ahead of a key June inflation report. The 30-year yield edged down by more than a basis point to 4.958%, the 10-year yield also slipped by one basis point to 4.419%, while the 2-year held firm at 3.9%.

Investors are waiting on the release of June CPI data, which most Wall Street analysts expect to reveal the impact of President Trump’s tariffs. Eastspring Investments warned, however, “If tariffs begin to show up clearly in the US June CPI data … US bond markets could sell off to reflect the higher inflation risk brought about by [US President Donald] Trump’s recent tariff escalation.”

The CPI figures will influence markets significantly, say analysts

Eastspring Investments also cautioned that a weaker-than-anticipated CPI could prompt the US government to treat tariffs as a painless revenue stream to offset tax cuts outlined in the “big beautiful bill.”

Earlier, Mark Cabana, head of US rates strategy at BofA Securities, stated that an inflation rise could make traders reconsider their expectations on Federal policy. So far, the probability of a rate cut in September now stands at around 65%, down from a near-certain prediction. He further argued that an inflation hike will compel a market pause.

Zachary Griffiths, CreditSights’ head of investment grade and macroeconomic strategy, also stated that the CPI data will dictate the Federal Reserve’s next move and risk sentiment for the rest of the year.

Also, like many other analysts, Tracy Chen, a portfolio manager at Brandywine, said traders would see the tariff war’s impact in the CPI numbers.

Meanwhile, White House National Economic Council Director Kevin Hassett suggested the Trump administration is looking into legal options to dismiss Federal Reserve Chair Jerome Powell. He remarked, “But certainly, if there’s cause, he does,” referring to Trump’s authority to dismiss Powell if there’s reason to. Despite Trump’s public assurances that he has no plans to dismiss Powell, Hassett’s comments suggest the White House is still weighing the possibility.

The Trump administration has been increasing its attacks on Fed Chair Jerome Powell lately. Officials have been pushing for the investigation into Powell’s oversight of the central bank headquarters’ renovation project, potentially as a basis for dismissing him before his term concludes. However, analysts, including Deutsche Bank strategist George Saravelos, predict that his premature removal could trigger a selloff in both the dollar and US Treasuries. 

Japan’s election and Trump’s trade tariffs affected long-term bond yields globally

Worldwide, government debt, particularly long-term bonds, has also faced pressure. Meanwhile, yields in Japan have fueled expectations of increased spending and tax cuts. Long-term bond yields have also risen in Germany and France, as investors demand higher compensation for funding higher defense budgets.

More broadly, Japan’s election and Trump’s capricious tariff pronouncements reignited general concerns over increasing government debt, unrestrained spending, an oversupply of bonds, and rising inflation in developed economies.

Speaking to Bloomberg Radio on Monday, George Bory, chief investment strategist, fixed income at Allspring Global Investments, confirmed that there’s a huge tendency for countries to rely on deficit spending, adding that“ the relief valve is the long end of the curve.”

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