Rising Inflation Pressures Push Bond Yields Higher  
with Adam Phillips, Managing Director, Investments 

Inflation surprised to the upside last week as both the Consumer Price Index (CPI) and Producer Price Index (PPI) came in higher than expected, adding to concerns that the ongoing conflict in the Middle East is beginning to impact price levels across the U.S. economy.

While markets have largely focused on inflation itself, the more significant reaction may be taking place in the bond market. Treasury yields moved sharply higher last week, pressuring equities and signaling growing concerns about inflation and Federal Reserve policy.

As of this update:

• The 30-year Treasury yield has risen to approximately 5.1%
• The 10-year Treasury yield has climbed above 4.5%
• The 2-year Treasury yield is now around 4.1%

The rise in shorter-term yields is particularly notable because the 2-year Treasury is now yielding above the Fed’s current policy rate. That can signal the bond market believes the Federal Reserve may need to tighten policy further to keep inflation contained.

Markets are now increasingly pricing in the possibility of another rate hike rather than a rate cut. That creates a challenging backdrop for incoming Federal Reserve Chair Kevin Warsh, who assumes the role this week amid elevated inflation concerns and growing pressure on monetary policy.

Importantly, higher yields are not always negative. In some environments, rising yields can reflect stronger economic growth expectations. However, current market behavior appears more tied to concerns that inflation could become more persistent if geopolitical tensions continue and energy prices remain elevated.

Looking ahead, investors will be closely watching both earnings season and consumer spending trends. Nvidia is among the final major companies set to report earnings this quarter, with markets looking for additional insight into artificial intelligence demand and broader technology spending trends.

At the same time, several large retailers, including Walmart, Target, Lowe’s, Home Depot, TJX, and Ross Stores — are reporting results this week. Investors will be focused less on past-quarter performance and more on what these companies are seeing from consumers today.

Consumer spending received support earlier this year from larger tax refunds tied to the One Big Beautiful Bill Act, which increased average refunds by roughly 18% year over year and added an estimated $50 billion to household finances.

Now, with that temporary boost fading and energy prices remaining elevated, markets will be watching closely for any signs that consumer confidence or spending habits are beginning to weaken.

 Often quoted in major national media, Adam is a Chartered Financial Analyst (CFA^®), a CERTIFIED FINANCIAL PLANNER™ (CFP^®), and has been included on the Forbes NextGen Best-in-State Wealth Advisors 2019 list. He is a member of the CFA Society of Los Angeles and the CFA Institute. Adam helps establish asset allocation strategy as a member of the EP Wealth Investment Committee, which supports all EP Wealth Advisors and their clients. The Committee’s top-down approach to portfolio construction begins with an outlook on the economy’s likely direction, followed by the implications for different economic sectors and asset classes. This culminates in strategic selection of the individual stocks, bonds, mutual funds or other investments deemed most appropriate for each individual client’s portfolio. 

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Video Transcript: 

Adam Phillips:

Well, it's now been about eighty days since the war in the Middle East began, and right now things are still at a standstill in the Strait of Hormuz. Actually, last week we got the latest reports for inflation. That's the CPI, the Consumer Price Index, and the Producer Price Index, both surprise to the upside, meaning that inflation came in higher than expected.

And so we are nars- now starting to see the signs that these, this prolonged war is starting to have on price levels in the US economy. We're really starting to see this show up in the bond market, though. That's what I wanna touch on for a few minutes this week because just to the extent that it could as have some kind of an impact on risk sentiment and the overall equity market.

We actually saw equity sell off on Friday because we saw bond yields spike. So if you look at the long end of the curve, the thirty-year treasury is now yielding about five point one percent. We've surpassed four and a half percent, which most see as kind of this critical level on the ten year, uh, ten-year treasury.

So as of this recording, we're at about four point six percent. And then finally, we are seeing the two-year treasury, uh, yielding about four percent. Actually four point one percent, uh, to, to be, uh, to be exact. So why does this matter? If we look at the shorter end of the curves, that two-year treasury, it's actually yielding about twenty-five basis points or point two five percent higher than the target Fed funds rate, so the policy rate that the Fed controls.

That is essentially the bond market signaling that the Fed is possibly offsides here, and, and they should actually have a policy be a little bit tighter. They should raise rates because inflation is starting to become a problem. So not surprisingly, we are starting to see that expectations for the next policy move are pointing towards a hike rather than a cut So in short, with Kevin Warsh, uh, about to assume the role as Fed chair, he's actually being sworn in on Friday by President Trump, I do not envy his role.

He's coming in at a really tough time, and so we'll see where policy goes from here. But that is what the bond market is saying. In the intermediate and the longer end of the curve, so the 10, the 30-year Treasury, we're seeing yields move a lot higher, as I said. Now, historically, there's, there's a couple of reasons that yields can go higher.

Some can be good reasons. We could see yields go higher because bond market investors are expecting the economy to, to really heat up, to, to grow quite a bit faster. This is not one of those cases, and this is one of those bad reasons where people are really looking at the fact that inflation is a problem and it risks becoming unanchored if we don't see resolution in the Middle East and/or, uh, some, uh, some move by the Fed to try to put downward pressure on inflation and keep it contained.

So as far as what we're looking at this week, it's a relatively light week as far as the economic calendar goes. We'll be focused on earnings. So we're about 90% of the way through this earnings season, but we've saved the best for last. As usual, Nvidia is one of the last to report, so they'll be reporting this week.

They are the most valuable company, so current market cap of about $5.4 trillion, and they account for almost 9% of the S&P 500. So really one of the biggest names out there in this artificial intelligence themes, and so they can really move the needle. But we're gonna be focused not just on Nvidia, what they have to say about the state of artificial intelligence, but also on consumer.

There's a number of big re-retailers that are reporting this week, and so we wanna know how the consumer is doing. We're scheduled to hear from Walmart, Target, Lowe's, Home Depot, TJX, Ross Stores, a number of retailers. And so what we're, we're not really looking for how the consumer did in the first quarter, which is what they'll be announcing, but we're gonna be looking for signs of a, a weakening consumer, whether any, uh, propensity to spend or, or just buying habits or intentions are changing among the consumer.

We know that in the first quarter, households were generally supported by the One Big Beautiful Bill Act, which provided, uh, a higher tax refunds for households. The average household saw their tax refund increase by about 18% over the prior year. That translates to additional, uh, additional wealth of about $50 billion.

That was nice. That supported consumers in the first quarter of the year, but that's gone And so now we know that we're dealing with higher energy prices. What does that mean for consumer confidence and ultimately their willingness to continue spending and, and helping to grow this economy? That's what we'll be looking out for.

So plenty for us to watch in the coming days. I'll leave it there for right now. If you have any questions, please don't hesitate to reach out to your advisor. We'll plan on checking back in a couple of weeks. I'm sure we'll have plenty to discuss then, but until then, please enjoy the Memorial Day holiday, and I'll see you soon.