Forecasting Bond Yields Just Got More Complicated

Yields on 10-year Treasuries were recently around 4.29%. (NYSE)

Strip away the U.S. government bond market’s heavy jargon—coupon, spreads, duration—and these assets are pretty simple: Buyers want to buy, sellers want to sell.

Bond prices fluctuate depending on which narrative—that of Treasury buyers or sellers—is dominating the market at the moment. But right now, the battle between the two looks to be at a stalemate, thanks to the many competing forces contained in President Donald Trump’s tax and spending megabill.

That push and pull has forced the market into a precarious equilibrium: Yields on 10-year Treasuries, at 4.29%, are just about in the middle of the 52-week low of 3.622% and high of 4.802%. Yields collapsed in June, but rose in July. (Bonds prices and yields move inversely.)

Underneath the surface, traders are getting very mixed signals, especially from Trump’s tax and spending bill, passed by the Senate on Tuesday. The bill puts more wealth into the hands of the rich through tax changes: The top 10% or Americans earning up to $184,600 can expect an average increase of $9,425 over the next decade to their annual after-tax income, a study by the Budget Lab at Yale shows. Earners below $13,350, or with no income, will see their after-tax income decrease by $560.

That scenario suggests Treasury prices will rise. Wealthy individuals are perceived to have little incentive to spend that additional money since their needs are already met, and could put their money into safe government bonds instead. Such demand would push yields lower.

“They are going to save a lot of it and that means they’ll be buying bonds, directly or otherwise,” such as by increasing their “pension pots,” TS Lombard’s Chief Economist Freya Beamish tells Barron’s. She notes, however, this will have only a partial effect on the market.

But challenging that narrative are projections for Trump’s megabill to add trillions to the national debt. That increased supply would push prices down—and drive up yield as buyers demand a higher premium for holding the extra debt. Fear of tariff-induced inflation also supports higher yields. When more traders believe inflation strengthens from here, buyers can demand higher yields to compensate for the loss in their value of future returns.

While May inflation data were soft, economists say price growth could pick up in June and July as the impact of tariffs finally starts to show up in the data.

“There is a lot else going on,” Beamish adds. “Yields will at least be stickier.”

Those dueling narratives—which create a more balanced bond market where yields are neither worryingly high or low—make the stakes even higher for Thursday’s employment report. Economists tracked by FactSet expect a 115,000 increase in payrolls in June, lower than May’s 139,000 jobs added.

A weaker-than-expected employment report could send yields falling and bonds prices rallying, as the market boosts its expectation for a July interest-rate cut. Federal Reserve Chair Jerome Powell, speaking at an event in Portugal on Tuesday, declined to rule out a July cut as well. Conversely, a stronger-than-expected payroll report on Thursday could trigger a Treasury selloff as investors expect interest rates to remain elevated.

The 10-year settling above the 200-day moving-average of 4.317% in the coming days could signal that rates are likely headed higher from there. When price of an asset or yield drops below a moving average, it indicates a possible downtrend.

Write to Karishma Vanjani at karishma.vanjani@dowjones.com