Until recently, the message from the bond market has been that tariffs are deflationary because they depress global economic activity. As Warren Buffett recently observed, they are a tax that consumers, importers, and/or exporters pay. It is widely presumed that tariff increases have a transitory, one-shot, price-rising impact.
Indeed, on Sunday, US Treasury Secretary Scott Bessent predicted that the Chinese "will eat any tariffs that go on." On Tuesday, the Trump 2.0 tariff on China was raised from 10% to 20%. It's unlikely that Canadians and Mexicans will eat the 25% tariff imposed under Trump 2.0 on Tuesday; rather, US consumers will. Recognizing this, on Wednesday the White House announced a one-month tariff exemption for automakers.
We've been forecasting that the 10-year US Treasury bond yield should range between 4.25% and 4.75% this year (chart). It fell slightly below that range in recent days during the tariff turmoil. Now it is back at 4.28%. The comparable TIPS yield has fallen recently on weaker-than-expected US economic data.
