A softer-than-expected U.S. inflation report for April initially pushed Treasury yields lower, rekindling hopes for Federal Reserve rate cuts in 2025. But by the end of the trading session, that optimism had faded as investors shifted into equities and weighed the implications of ongoing fiscal expansion, a temporary U.S.–China trade truce, and ambiguous forward guidance from the Fed. 

While Wall Street still prices in two quarter-point cuts by year-end, the timeline is drifting later into the calendar. Mihan Nikolic, a senior financial strategist at Horizon28, explores how this shifting environment is reshaping bond markets, rate expectations, and broader investor behavior.

From Rebound to Retreat: Bond Market Reverses Initial Gains

The April Consumer Price Index (CPI) came in cooler than anticipated, triggering a brief rally in U.S. government bonds. However, the optimism was short-lived. The two-year Treasury yield, which is especially sensitive to Fed policy expectations, initially dipped to 3.95% before climbing back to around 4.02%, signaling a market unsure about the staying power of any policy shift.

Longer-dated yields, including 10- and 30-year bonds, climbed several basis points, marking their highest levels in a month. The rebound in yields suggests investors were pivoting toward risk assets, not due to inflation fears, but due to momentum chasing in equity markets, and growing skepticism over near-term easing by the Fed.

Rate Cut Forecasts Pushed to Year-End

Despite pricing in two cuts, Wall Street’s big banks are backing away from earlier forecasts. The mood has shifted:

• Goldman Sachs, Barclays, and JPMorgan now predict the first rate cut in December, moving their earlier estimates from July or September.
• Citigroup remains slightly more optimistic, shifting from June to July.
• Derivatives markets, however, continue to reflect expectations for two 25-basis-point reductions by the end of 2025.

These revisions reflect a blend of factors—temporary tariff de-escalation, robust equity performance, and continued caution over inflation persistence, particularly in light of expanding fiscal stimulus.

Tariff Pause Adds Uncertainty, Not Clarity

The three-month trade truce between the U.S. and China has buoyed sentiment but hasn’t meaningfully changed the long-term inflation or growth outlook. Analysts caution that:

• The remaining tariffs are still exerting upward pressure on supply chain costs.
• Many companies are still working through stockpiled inventory, which may delay the full inflationary effects of tariffs until later this year.
• At the U.S.–Saudi investment forum, America’s current president claimed a $1 trillion investment commitment, a figure that fueled equity optimism—but also stoked questions about future fiscal pressure and its inflationary impact.

Meanwhile, fiscal policy headlines—such as the proposed $3.7 trillion revenue loss over ten years from a draft tax bill—are adding fresh layers of concern about long-term debt sustainability.

Equities Rally, Bonds Get Sidelined

The flow of capital this week told a compelling story: investors are growing more comfortable with risk. A surge in investment-grade corporate bond issuance and rising stock valuations suggest that money is rotating away from Treasuries into higher-return assets.

This dynamic is consistent with recent commentary from market desks:

• “Some money is moving out of Treasuries and into risk assets,” one strategist noted, describing it as a “momentum trade” rather than a fundamental repricing.
• Interest-rate options markets also reflected a bias toward rising long-maturity yields, indicating that not everyone is convinced inflation has been tamed for good.

Inflation Still Murky, Fed Still Cautious

Despite the lower-than-expected CPI print, the Fed remains focused on the labor market and core goods pricing stability. As noted by several analysts, the central bank is unlikely to act on one or two soft inflation reports, especially when tariff-related pressures could resurface in the coming months.

• CIBC analysts argue that without a shift in labor data, a weak CPI print “matters very little for the level of yields.”
• Furthermore, there’s consensus among strategists that rate cuts will remain conditional on broader economic moderation, rather than short-term inflation trends.

This patience reflects a deeper recognition: cutting too early could reignite inflation, while waiting longer might risk overcooling. The Fed is threading a needle between two uncertain outcomes.

Trade Tensions and Tariff Math Still a Wildcard

Even as bond markets adjust, the trade war’s long shadow lingers. The reprieve may be encouraging for equities, but tariffs that remain in place will ultimately be absorbed in either prices or corporate margins, both of which affect the Fed’s calculus.

• BlackRock’s market strategists caution that lingering tariffs represent a drag on productivity and pricing efficiency.
• Moreover, short-term growth outlooks have been revised downward, even with the boost in market sentiment, as firms brace for input cost volatility.

Conclusion

The initial bond rally following April’s soft inflation report offered a glimpse into how eager markets are for rate cuts. Yet the rally’s reversal and the pushback of cut forecasts into December reflect a more grounded reality: the Fed is unlikely to act quickly without broader and more sustained economic softening.

Investors are navigating an environment shaped by uncertain trade policy, inconsistent fiscal signals, and stubborn pricing pressures. Whether the Fed delivers two cuts—or any at all—will depend on whether inflation fades or fiscal stimulus and tariff risks once again drive it higher.

For now, U.S. bonds are caught between hope and hesitation, and so are the markets that depend on them.