The factors that led to the inflation surge during the pandemic are no longer present. There is scepticism about tariffs causing long-term inflation, with doubts that a 10% tariff could push inflation to 3%.

Policy considerations should focus on the real economy when inflation is near the target. The Federal Reserve is believed to be nearing its inflation target.

Market Forces And Long Term Yields

Market forces are responsible for determining long-term yields. These yields have risen partially due to concerns about government fiscal policies.

There is no perceived issue with the sale of government bonds. Additionally, long-term yields have increased due to anxiety among foreign buyers.

Federal Reserve member Chris Waller indicated that rate cuts could be possible later in 2025.

The article outlines a cooling in the inflationary pressures that surged during the pandemic, suggesting that the triggers behind those sharp price increases—such as disrupted supply chains and extraordinary government stimulus—have since dissipated. It downplays the inflationary threat posed by proposed tariffs, implying that even a relatively broad-based 10% tariff would not exert enough upward pressure to sustain an inflation rate above current targets.

From a broader perspective, the discussion shifts towards how central banks should act when inflation hovers near their target range. In this case, attention turns to the real economy rather than relying solely on traditional inflation metrics. The central point is that if price increases are settling within the preferred corridor, then monetary policy decisions—such as interest rate cuts or hikes—should reflect underlying economic strength rather than short-term noise.

Long-term yields, meanwhile, are seen as primarily reacting to investors’ views on fiscal sustainability and public debt levels. These yields have moved higher, in part because of growing concern about how governments are managing their finances. The recent uptick isn’t being linked to any direct problems with auctioning government bonds. Instead, it is more subtle—reflecting hesitation or caution on the part of foreign investors who are watching fiscal developments with a sceptical eye.

Implications For Interest Rate Strategies

What Waller has indicated—offering a potential easing of rates later into next year—adds a useful time marker. It suggests central bank officials are open to loosening policy again, but only if certain conditions are met. That outlook plays into forward pricing in the rates market, and as one might expect, introduces volatility across the belly and long end of the curve.

For those of us who watch the derivatives space—particularly interest rate futures and options—this means implied volatility could remain elevated while opinions about timing continue to shift around new data points or speeches. With bonds reacting mostly to macro signals and rate paths no longer locked into a single track, we should be prepared to recalibrate strategies week by week. Yield curve trades, for example, may need to take into account not just the eventual level of rates, but also how the market anticipates changes across maturities.

This mix of gradually falling inflation, ongoing fiscal anxiety, and shifting central bank tone sets up a short-term environment where price action will likely overreact to small changes in guidance or data. It tells us that liquidity matters more in execution, especially with fewer firm anchors in rate expectations heading into the year-end period. More defensive posturing, narrower stops, and a re-examination of carry trades should be part of the weekly routine.

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