Can Waller's coming to power reverse the rise in U.S. bond yields?

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Inflationary pressure has reignited, pushing global bond yields to multi-year highs. The yield on the U.S. 30-year Treasury touched 5.18%, the highest since 2007; the 10-year yield climbed to 4.66%, marking a new high since January 2025.

The market once expected that, after Walsh takes over as the Fed Chair, monetary policy would turn more dovish, thereby suppressing U.S. Treasury yields. However, the latest report from Guotai Haitong Securities points out that this expectation severely overestimates the boundary of the Fed’s policy capabilities.

The report argues that the U.S. currently faces three structural internal constraints: inflation stickiness, fiscal deficit expansion, and the AI capital bubble, making the Fed’s operating room much narrower than the market expects. Meanwhile, three external pressures—global supply chain restructuring, the spillover effects of major trading partners’ monetary easing, and the continued decline of the dollar’s status as global reserve currency—further erode the external conditions for U.S. Treasury yields to fall.

Against this backdrop, no matter who serves as Fed Chair, the downside for long-term rates is extremely limited, and a steepening yield curve is the most probable path.

Internal Constraints: The Triple Shackles of Inflation, Fiscal Deficits, and the AI Bubble

The three structural domestic constraints in the U.S. have significantly narrowed the Fed’s policy room.

Inflation stickiness continues to heat up. In April 2026, the annual U.S. CPI rose to 3.8%; the monthly core CPI reached 0.4%, the largest single-month increase of the year. The Atlanta Fed’s tracked sticky price CPI is up 4.6% annualized, and the core jumped to 4.8%, indicating inflation pressure is deeply embedded in rents, services, and other slow-moving variables. The mainstream market forecast sees May CPI possibly breaking above 4%, and renewed inflation acceleration is becoming the base case scenario. In this context, a rash rate cut would find little FOMC political support and would face a credibility challenge.

Fiscal deficit expansion intensifies long-end pressure. The federal deficit for fiscal year 2025 has reached $1.8 trillion, and large-scale tax reforms and spending plans in the next decade will expand the deficit by more than another $3 trillion. The Treasury has significantly increased debt issuance, and short-term Treasury bill supply may surge more than $1 trillion in the second half of the year, with supply pressure for long-duration coupon bonds set to transmit into long-end yields. Continuous supply expansion without marginal demand increase puts upward structural pressure on long-term rates. Even if the Fed cuts rates, the 10-year Treasury yield may not fall in step; monetary policy transmission is greatly diluted in the face of fiscal pressure.

The AI bubble raises inflation and market risks. In 2025, the four major tech giants’ AI capital spending reached about $410 billion, or roughly 1.3% of U.S. GDP, with the 2026 forecast rising to 1.6%. Massive capital expenditure driven by the AI narrative has pushed up prices for energy, land, and high-end manufacturing. The S&P 500 is valued at about 23 times forward earnings, bubble levels approaching those seen at the turn of the century during the internet bubble. Sustained real investment fervor continues to fuel inflation, and once the bubble bursts, the Fed would be caught in a dilemma between stabilizing markets and fighting inflation. Simply replacing the Fed Chair cannot realize a broad downward shift in the yield curve.

External Erosion: U.S. Pricing Power Weakens Amid Global Supply Chain Restructuring

Global structural forces also undermine the downside for U.S. long-end yields from three dimensions.

Tariffs reshape supply chains, raising the inflation baseline. Excluding low-cost supply sources from global supply chains forcibly raises the mid-point of global production costs. According to St. Louis Fed data, from June to August 2025, tariffs contributed about half a percentage point to annualized U.S. PCE inflation; for the 12 months ended August 2025, tariffs explained 10.9% of overall PCE inflation. The “tariff equals inflation” transmission mechanism has been well validated by data.

Exchange rate volatility amplifies reflation risk. Major manufacturing countries are using monetary easing to address trade friction, weakening their currencies and exporting exchange rate volatility and commodity price pressure globally. The construction cycles for alternative domestic supply are longer and costlier, so global commodity reflation risk is magnified in the short-term. The IMF points out that tariffs are a supply shock for the U.S. but a demand shock for other economies, further diversifying inflation patterns and significantly increasing the difficulty of global central bank policy coordination.

The dollar’s reserve status loosens, weakening external demand for Treasuries. The dollar’s share in global official FX reserves has fallen from about 71% at the start of this century to roughly 56% currently, hitting a twenty-year low. Central banks worldwide are rapidly diversifying, with the strategic weight of gold, the euro, and emerging market currencies continually rising. Marginal buying from foreign central banks is weakening, and demand support for long-dated Treasuries is increasingly thin. The Fed’s own research admits that if market confidence in the U.S.’s debt-servicing or currency management falters, demand for dollar assets will face deeper erosion.

TACO Can't Change the Main Direction of Rates, Steepening Curve Is Most Probable Path

The so-called “TACO” (Trump Always Chickens Out) describes the repeated pattern where Trump announces radical tariff measures, markets crash, then the White House softens its stance and risk assets rebound. After the tariff delay against Europe in 2025, the S&P 500 surged over 2% in a single day, but the 30-year Treasury yield simultaneously returned near 5%. The bond market is sending a clear message: Tariff concessions can't solve fiscal deficits, inflation stickiness, or supply pressure; these are the core variables for long-end pricing.

No matter which policy path the Walsh-led Fed takes, curve steepening is the likely outcome.

Path One: Continued Rate Cuts. Short-end rates fall in line with the federal funds rate; the long-end is constrained by fiscal supply and inflation premium, the movement is obviously blunted, resulting in a bull steepening pattern. Since the Fed began its rate cut cycle in September 2024, the 10-year Treasury yield has not fallen but instead climbed from 3.65% to a January 2025 high of 4.79%.

Path Two: Accelerated Easing. If the Fed, under political pressure, speeds up loosening, the market will question its independence, with inflation expectations repriced and term premium in long-end rates climbing further. Currently, the 10-year term premium has reached its highest level since 2011.

Overall, betting unilaterally on a sharp drop in the 10-year Treasury yield is extremely low value under the current macro framework. By contrast, trading logic for 2s10s or 5s30s curve steepening is more advantageous—with short-end rate cut expectations supported and long-end supply pressure plus inflation premium as tailwind, the risk-reward ratio is clearly superior. Trump’s TACO traits could offer tactical windows for long positions, but this is a matter of tactical gaming, not a strategic directional shift.

Risk Disclosure and DisclaimerMarkets are risky; investments need to be made cautiously. This article does not constitute personal investment advice, nor does it take into account individual users' specific investment objectives, financial situation, or needs. Users should consider whether any opinions, viewpoints, or conclusions herein are suited to their specific circumstances. Investing based on this article is at your own risk. ```