With Kevin Warsh poised to take the helm of the Federal Reserve, bond investors generally believe he will continue the style of his predecessors, prioritizing the Fed's core function of curbing inflation rather than complying with Trump's demands for interest rate cuts. Market traders are currently pricing in a rate hike by the Fed before December.



This market sentiment is drastically different from three months ago, when investors were betting on multiple rounds of interest rate cuts by the Federal Reserve. Currently, the US economy is resilient, energy costs remain high, and investment in artificial intelligence is booming. Market concerns are growing that inflation will remain above the 2% policy target for an extended period, forcing the Fed to raise interest rates to risk levels. Last Friday, the yield on two-year US Treasury bonds climbed to a more than ten-year high.

Since Trump took office, protectionist trade policies and various strategic maneuvers targeting rival countries have further fueled market reflation expectations. On Monday, a supertanker loaded with Iraqi crude oil bound for China sailed out of the Persian Gulf, crossing the US-imposed blockade into the Arabian Sea. This incident has raised market hopes for a near-term resumption of full navigation through the Strait of Hormuz, but both the US and Iran have stated that a substantial breakthrough in the situation is unlikely in the short term. An Iranian Foreign Ministry spokesperson stated that the two sides did not discuss nuclear-related issues, which are of paramount concern to Trump.

Data shows that in the week ending May 20, global bond funds saw a net inflow of $21.89 billion, marking the seventh consecutive week of bond buying spree.

The bond market harbors potential downside risks.

Driven by soaring energy prices, the personal consumption expenditure price index is likely to rapidly approach 4%, raising growing concerns that inflationary pressures will spread across all industries. The core personal consumption expenditure price index is highly likely to rise in April, reaching its highest growth rate since the end of 2023.

Data from the University of Michigan's consumer survey indicates that U.S. consumer confidence fell to a record low in May; meanwhile, people's inflation expectations for the next year rose to 4.8% from 4.7% last month.

The economic landscape is showing significant divergence: US manufacturing activity hit a four-year high this month, offsetting the negative impact of a slowdown in the service sector. In addition, overall purchasing costs for businesses across the US have surged, indicating continued inflationary pressures. Chris Williamson, chief economist at S&P Global Market Intelligence, analyzed, "It's highly unlikely that the annualized GDP growth rate in the US will exceed 1% in the second quarter of this year."

As of May 22, the iShares 3-7 Year U.S. Treasury Exchange Traded Fund had fallen by approximately 2.1% from its all-time high at the end of February. The fiscal black hole created by the U.S. federal government debt problem has further deterred a large number of potential investors.

The total size of the US federal debt has now exceeded the gross domestic product, a critical threshold that has never been broken since the end of World War II, which also shows that Trump's promise to balance the fiscal budget has failed.

Wall Street strategists point out that even if the inflation problem caused by geopolitical conflicts eases, the current upward trend in US long-term Treasury yields is unlikely to be completely reversed, and the downside potential for related bond funds has not yet been exhausted.

The bond market has recently shown significant divergence: long-term government bonds have been more severely impacted than short-term bonds. The yield curve has flattened and steepened in a bearish trend, triggering a large-scale sell-off of long-term bonds.

Jonathan Hill, head of U.S. inflation strategy at Barclays, said, "The expansion of debt, rising equilibrium interest rates, and the development of the artificial intelligence industry are all factors that have pushed up real long-term interest rates in the United States." In the long term, artificial intelligence can improve productivity and thus curb inflation; however, in the short term, the continued increase in R&D investment by major technology giants may exacerbate inflation volatility.

Furthermore, the artificial intelligence boom has driven economic growth, leading to a surge of capital into the stock market. To attract investment, the bond market has had to raise yields. A Bloomberg analysis report shows that the rise in yields in the US and UK is mainly driven by rising real interest rates; while yield fluctuations in Japan and Germany are primarily driven by inflation.

JPMorgan Chase CEO Jamie Dimon said in an interview last week that the U.S. benchmark interest rate is likely to rise significantly in the future due to massive government borrowing and the imbalance between bond supply and demand.

Under these circumstances, gold prices will face significant downward pressure. Although the SPDR Gold ETF has risen for three consecutive years, it is unlikely to maintain its upward trend this year.