U.S. Bond Market Flashes Warning amid Growing Tariff and Inflation Risks

The U.S. bond market is flashing a new warning as tariff risks once again rise.

Market-based measures within the bond market of future inflation have risen to worrisome levels, with some observers pointing to the potential for another round of tariff-driven price gains in the year’s second half.

On July 18, breakeven inflation rates that reflect expectations of future long-run price increases climbed back to levels last seen in early April, when fears over U.S. President Donald Trump’s tariff plans against America’s trading partners were at their peak. In recent months, the bond market had looked past the worst possible potential impacts of tariffs.

Rising Inflation Expectations

The five-year breakeven inflation rate is up four basis points at 2.53%, according to data from FactSet (FDS). That’s above the 2.50% level that tends to signal fear of upside inflation risks. Ten- and 30-year breakeven inflation rates are also climbing higher.

The rising inflation expectations come amid reports that President Trump is pushing for a minimum 15% to 20% tariff on all imports from the European Union. Analysts say the bond market is trying to determine whether any tariff-driven inflation will be short-lived or long-lasting, and if a rise in inflation will keep the U.S. Federal Reserve from cutting interest rates.

The latest economic data showed that inflation in the U.S. is on the rise, registering annualized growth of 2.7% in June, up from 2.4% in May and above the Fed’s 2% target.

Is the Vanguard Total Bond Market ETF a Buy?

Most Wall Street analysts don’t offer recommendations on the Vanguard Total Bond Market ETF (BND). So instead, we’ll look at its year-to-date performance. As one can see in the chart below, the BND ETF has risen 3% so far in 2025.