Fiscal Jitters Return to Treasuries as Middle East Risks Ease

(Bloomberg) -- Bond investors are shifting their focus back to troubling questions about US fiscal risks, after a ceasefire between Israel and Iran cleared a stormcloud hanging over global markets.

President Donald Trump’s announcement of a ceasefire in the Middle East led to clear moves across markets on Tuesday, pushing stocks and risk-sensitive currencies like the Australian dollar higher while gold and the dollar fell. One outlier: Treasury yields, which barely budged as investors turned their attention back to a series of conflicting signals coming from the world’s largest economy.

“De-escalation in the Middle East has eased near-term inflation concerns, but uncertainty from tariff risks and fiscal policy still lingers,” said Charu Chanana, chief investment strategist at Saxo Markets.

The sense of uncertainty in the Treasury market underscores the dizzying calculations investors are being forced to make as they try to game out the impact of tariffs and the potential path for interest rates. 

Trump’s proposed ‘big beautiful bill’, which is nearing a vote in the Senate, has added to concerns about the US fiscal deficit, while the trade war has fueled worries about inflation — both factors that should put upward pressure on yields. But some Federal Reserve officials are ramping up talk about sooner-than-expected rate cuts, which should pull yields lower.

The net result: a holding pattern. US 10-year yields edged lower to 4.33% in Asian trading Tuesday, while 30-year yields declined a basis point to 4.86%.

“Investors are balancing concerns of higher inflation and a potential downturn, both stemming from a tariff policy that continues to evolve,” wrote Tim Ng, fixed income portfolio manager at Capital Group, which oversees more than $2.8 trillion. 

Watch Long Bonds 

Bond traders are likely to keep their focus on the long-end of the curve, said Chanana, adding that longer tenor bonds are particularly vulnerable to fiscal stress, the budget reconciliation bill and tensions between Trump and Fed Chair Jerome Powell, who the president has criticized for not cutting interest rates.

More immediately, investors will be scrutinizing Powell’s testimony at the House Financial Services Committee on Tuesday, a chance for the market to get fresh clues on the direction of monetary policy.

What Bloomberg Strategists Say...

There’s a strong chance Powell reiterates his post-FOMC comments that tariffs will have an impact at some stage this summer. Meaning the path for rates will remain unclear until policymakers get to see what the effect of the levies turns out to be.

Garfield Reynolds, Markets Live strategist

Higher yields mean funding pressure at a time when the US is borrowing more and government spending remains rampant. US 30-year yields touched an almost two-decade high of 5.15% last month. And as yields whipsaw, strategists warn some of the traditional anchors that once made Treasuries a bedrock of global bond portfolios are now looking increasingly fragile. 

“The risk is that there’s going to be a movement higher in yields on some sort of inflation shock or resetting of the outlook for the fiscal position in the US,” said Kerry Craig, global market strategist at JPMorgan Asset Management. 

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