Bond Market Holding Steady, Despite Sticky Inflation — Evening Brief – 02.21.25
The bond market’s performance in 2025 so far—highlighted by the 1.0% gain in the investment-grade benchmark (BND), 1.9% rally in high-yield bonds (JNK), and strong showing from the iShares TIPS Bond ETF (TIP)—suggests resilience despite persistent inflation concerns.
High-yield bonds leading the pack could indicate that investors are still willing to chase riskier assets, possibly betting on economic growth holding up even with inflationary pressures. Meanwhile, the near parity of TIPS with junk bonds underscores how inflation expectations are a significant driver of market behavior right now.
Inflation remains the elephant in the room. The Fed’s 2% target continues to feel out of reach, especially with consumer prices showing signs of acceleration. The CME FedWatch Tool’s indication of steady rates at the March 19 meeting aligns with the Fed’s cautious stance, as seen in the January FOMC minutes and St. Louis Fed President Alberto G. Musalem’s comments on Thursday in prepared text for his speech to the Economic Club of New York.
“After 100 basis points of interest rate cuts in the fall, I judge that monetary policy is modestly restrictive, and meaningfully less restrictive than it was six months ago,” he said.
This is likely enough to keep inflation in check without choking the economy, especially since the labor market remains robust. This balancing act explains why further rate cuts are off the table unless inflation cools significantly, or employment weakens.
Trump’s tariff and immigration policies add intriguing wildcards. Higher tariffs could indeed spike inflation in the short term by raising import costs, which would complicate the Fed’s mission.
On the flip side, Federal Reserve Bank of Chicago President Austan Goolsbee’s point in a fireside chat hosted by the Chicagoland Chamber of Commerce this week about immigration driving over half of job growth in the past decade highlights a potential downside risk: large-scale deportations could shrink the labor supply, potentially easing wage-driven inflation but also slowing economic momentum. The Fed’s “play it by ear”, said Goolsbee, approach here makes sense—specific policy details from the Trump administration will determine the real impact.
For the bond market, this all translates to a holding pattern. With rate cuts looking unlikely and inflation risks simmering, the room for bond prices to rally further seems limited unless something shifts dramatically—say, a surprise drop in inflation or a policy misstep. Investors appear to be treading water, waiting for clearer signals.
If you’re looking for a take on what’s next, it hinges on a few key questions: Will inflation data stay “sticky,” forcing the Fed to tighten its stance? How aggressively will Trump push tariffs, and what will that do to prices? And could immigration policy shifts upend the labor market’s strength? For now, the Fed and the bond market are both playing a patient game, and that feels like a rational move given the uncertainty.