Still more questions than answers but...

Since early May, the US 10-year Treasury yield has fluctuated in a narrow range between about 4.20% and 4.60% as the market awaits more clarity on several points. While peak uncertainty that caused massive interest rate volatility earlier this year may be behind us, there are still many unanswered questions:

What will be the mix of tariffs across US trading partners? 

The 90-day negotiating period that started April 9 has seen broad deals struck with China and the UK. Meanwhile, the base 10% tariff has been in place. As the 90-day period nears its end in early July, the administration may announce more deals, revised tariff levels, or an extension of the negotiating period.

How will tariffs affect domestic prices and growth? 

Conventional forecasts suggest tariffs should boost inflation and dampen growth given the weighted average tariff on US imports has risen by over five times this year. These effects are apparent in the Federal Reserve’s recent upward revisions to 2025 inflation and downward revisions to growth in their Summary of Economic Projections. That said, the extend of the impacts remains uncertain. 

Does the “hard” economic data weaken significantly?

The “soft” data of consumer and business surveys has displayed a negative tilt for months, while the broader “hard” economic data has held up well. More recently, however, cracks may be emerging. For instance, the three-month average change in non-farm payrolls slowed to 139,000 jobs in May from 231,000 in January, with initial and continuing claims for unemployment insurance climbing to recent highs.

What is the net effect on the US deficit from the One Big Beautiful Bill and the increase in tariff revenues?

Deficit/GDP figures have been running at levels previously seen only during recessions, even while the US economy is expanding. Also, the public held debt-to-GDP ratio has reached about 100% for the first time since the aftermath of World War II. To be sure, bond market participants have fretted about deficits for decades with little market impact. Looking forward, the deficit and borrowing outcomes in D.C. likely will affect bond yields and term premiums more than in the past.

So now what?

To be sure, the US economy has been resilient amid this array of questions. This resilience has combined with AI exuberance and tax cut hopes to recharge equity and credit outperformance. Even as the Middle East conflict expanded to include direct US military action in bombing Iran nuclear sites, financial markets responded mildly. Markets seemed to assume that de-escalation was more likely than not, and the hostilities did not directly threaten oil supplies. Globally, growth expectations have deteriorated, partly attributable to trade policy and geopolitical conflicts, but also linked to structural issues in China and elsewhere.

With so many unanswered questions, it would be compelling to take a neutral duration position and wait for more clarity before positioning for a material change in yields. However, the US economy has sustained elevated levels of policy uncertainty that have weakened business and consumer sentiment and will increasingly show up in employment and consumer decision making. We believe that US hard data will soon weaken to precipitate a resumption of the long-paused Fed easing and Treasury yields will move lower in the months to come.