As always, economists had disparate interpretations of the consumer price index, with none expecting a July rate cut. And tariff questions remain unanswered.
"We expect no change to rates but [for the Federal Open Market Committee] to continue to signal that rate cuts should still be expected," said Cooper Howard, a fixed income strategist at Charles Schwab.
As Congress grinds through the budget reconciliation, fixed income market experts are eyeballing an uncontrolled national debt while dreading a heavy-handed response from the Treasury bond market.
A "lighter-than-anticipated CPI report" led to UST firmness, as it "quelled fears about tariff-related inflation and boosted enthusiasm that the Fed will cut rates in the next two or three meetings," said Jos? Torres, senior economist at Interactive Brokers.
Bond yields are shooting up for the second time in as many months. Federal Reserve Gov. Christopher Waller attributes the volatility to concerns about rising national debt levels.
A couple of "bond-friendly" economic reports released Thursday could encourage the Federal Reserve to reduce interest rates in the near future, some analysts argued.
Federal Reserve Vice Chair Philip Jefferson said in a speech Wednesday that elevated tariffs will likely lead to inflation, but time will tell how impactful that spike in prices might be.
Even with Monday's U.S.-China tariff truce and Tuesday's inflation print, the market has felt better over the past several weeks, said Jamie Iselin, managing director and head of municipal fixed income at Neuberger Berman.
Federal Reserve Gov. Adriana Kugler said in a speech in Dublin that trade barriers could soon affect prices and slow down growth while increasing uncertainty in 2025.
"The threat of having both inflation and unemployment rising simultaneously continues to create a big headache for the Fed's interest policy," said Wells Fargo Investment Institute global fixed income strategist Luis Alvarado.
The specter and economic implications of tariffs coupled with still above-target inflation and a healthy labor market will sideline policymakers at this week's meeting, analysts said, but not everyone agrees when the next rate cut will be.
"For munis, a strong jobs report should reverse recent credit spread widening, while a weak jobs report should keep credit spreads around current levels," said BofA strategists.
The Federal Reserve governor remains optimistic about tariffs being a one-time shock to prices, but the central bank still needs more clarity about what the policies will look like.
The International Monetary Fund lowered its economic growth projections for 2025, citing policy uncertainty. It also urged central banks to stand ready to use macroprudential tools to facilitate lending in a potential recession.
In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so avoiding losses caused by price volatility by holding them until maturity is not possible.
Lower-quality debt securities generally offer higher yields, but also involve greater risk of default or price changes due to potential changes in the credit quality of the issuer. Any fixed income security sold or redeemed prior to maturity may be subject to loss.
Before investing, consider the funds' investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Read it carefully.
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