Bond traders warn of inflation shock as US yield curve flattens

 (Bloomberg) — US bond markets are flashing a warning to US President Donald Trump that his move to unleash tariffs on top trading partners risks fueling inflation and stymieing growth.

Short-end Treasury yields rose as much as eight basis points to 4.28% on Monday as longer-dated rates held steady, flattening the curve by the most since November.

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Such moves are typically associated with stagflation — when inflation and elevated interest rates harm bonds in the short term, only for subsequently weaker growth to make longer-term debt more appealing.

Traders have pared bets on the extent of easing from the Federal Reserve this year and now see a 50% chance of two quarter-point rate cuts this year, down from 90% on Friday.

Over the weekend, Trump followed through on his threat to impose levies on the exports of Canada, Mexico and China, while reiterating a warning to the European Union that tariffs “will definitely happen.” Goldman Sachs Group Inc. is positioning for further curve flattening, and firms including BNP Paribas SA, Singapore’s DBS Bank Ltd. and Japan’s SMBC Nikko Securities Inc. said this puts the US economy at risk of falling into stagflation.

“Trump’s policy mix has increased stagflationary risks in the economy,” Calvin Tse, head of Americas macro strategy and US economics at BNP in New York, wrote in a note. That implies the Fed will keep rates on hold for the next couple of meetings while it judges whether growth or inflation risks are “more serious,” Tse added.