The higher-for-longer narrative returned with a vengeance Wednesday as new inflation data came in hotter than expected, and the rate-sensitive bond market proxy iShares 20+ Year Treasury Bond ETF (TLT) dropped 1.7% to start the day’s trading.
The U.S. Consumer Price Index (CPI) released Wednesday morning revealed a 0.5% increase for January, coming in higher than the consensus forecast 0.3%, bringing the annual rate to 3%.
Treasury yields climbed on the news, with the 10-year yield reaching 4.64%, indicating concerns over potential prolonged higher interest rates.
Concurrently, this week’s announcement of new steel tariffs, on top of last week’s broader tariffs on Canadian, Mexican, and Chinese goods, has heightened inflationary concerns. Economists warn that these tariffs could exacerbate inflation by increasing consumer prices on imported goods.
For example, the Federal Reserve Bank of Boston estimates that new tariffs could add as much as 0.8 percentage points to core inflation, which excludes more volatile food and energy prices.
Following yesterday’s CPI, the CME FedWatch Tool, which tracks Fed Funds Futures to gauge investor expectations, now forecasts just one rate cut in 2025.
TLT’s price was off its morning lows in afternoon trading but remained negative.
Other than the CME FedWatch Tool, a good gauge of market sentiment around inflation is ETF fund flows, which reveals where assets are flowing. Year-to-date, investors have poured nearly $4 billion into the iShares 0-3 Month Treasury Bond ETF (SGOV), according to data from etf.com’s Pulse Tool. This compares to $841 million in flows for TLT.
Other top ultra-short-term bond ETFs, the JPMorgan Ultra-Short Income ETF (JPST) and the SPDR Bloomberg 1-3 Month T-Bill ETF (BIL) had inflows of more than $2 billion and $1 billion, respectively.
The key takeaway from this data is that investors are betting more on higher-for-longer rates than they are on rate cuts, as ultra-short-term bonds pay higher yields with very little interest rate risk; whereas long-term bond ETFs like TLT are much more rate sensitive, meaning prices will fall much more when yields are rising on inflation concerns