Inflationary pressures have resurged, propelling global bond yields to multi-year highs as the 30-year U.S. Treasury bond yield climbed to 5.18%, its highest level since 2007.

Concurrently, the 10-year bond yield rose to 4.66%, marking a new peak since January 2025. Market participants initially anticipated that Josh Walsh's appointment as Federal Reserve chairman would trigger a pivot toward monetary easing, thereby depressing yields.

However, analysis by Guotai Haitong Securities suggests this outlook significantly overestimates the central bank's policy efficacy. The report identifies three internal structural constraints—inflationary inertia, widening fiscal deficits, and an AI-driven capital bubble—that severely restrict the Federal Reserve's maneuvering room. Simultaneously, external pressures including global supply chain reshaping, monetary spillovers from major trading partners, and the declining status of the dollar as a reserve currency erode the conditions necessary for yield declines. Woofun AI notes that regardless of leadership changes, the potential for long-term interest rate reductions remains extremely limited, making a steeper yield curve the probable outcome.

The United States faces entrenched inflationary inertia that narrows policy options. In April 2026, the overall Consumer Price Index (CPI) rose 3.8% year-on-year, while core CPI increased by 0.4% month-on-month, representing the largest monthly gain of the year. The sticky price CPI tracked by the Atlanta Fed showed an annualized month-on-month increase of 4.6%, with the core index reaching 4.8%, signaling that inflation has deeply penetrated slow-moving variables such as rent and services. Market forecasts project that year-on-year CPI in May may exceed 4%, indicating accelerating inflation. In this environment, rash interest rate cuts would encounter internal political resistance within the Federal Open Market Committee (FOMC) and undermine central bank credibility.

Expanding fiscal deficits are exacerbating long-term pressure on yields. The federal deficit reached $1.8 trillion in fiscal year 2025, with large-scale tax reforms and spending plans expected to add another $3 trillion over the next decade. The Treasury Department has significantly increased bond issuance, with short-term treasury bill supply projected to rise by more than $1 trillion in the second half of the year. Woofun AI data shows that with continued supply increases and stagnant marginal demand, long-term interest rates face structural upward pressure. Even if the Federal Reserve cuts rates, the 10-year yield may not decline correspondingly, demonstrating that fiscal pressures have greatly weakened monetary policy transmission.

AI-related capital bubbles are fueling both inflation and market risks. In 2025, four major tech giants spent approximately $410 billion on AI-related capital expenditures, accounting for about 1.3% of U.S. GDP, a figure expected to rise to 1.6% in 2026. These massive expenditures are driving up prices for energy, land, and high-end manufacturing. The S&P 500 index valuation stands at approximately 23 times expected future earnings, nearing levels seen during the Internet bubble at the start of the century. This surge in real investment continues to fuel inflation, creating a dilemma for the Federal Reserve between stabilizing markets and curbing inflation should the bubble burst. Simply changing the Federal Reserve chairman is unlikely to result in an overall decline in interest rates.

Global structural forces further weaken the foundation for long-term U.S. bond yield declines. Tariffs are reshaping supply chains and raising the inflationary baseline by excluding low-cost sources, effectively increasing global cost structures. Data from the Federal Reserve's St. Louis branch indicates that from June to August 2025, tariffs contributed approximately 0.5 percentage points to annualized PCE inflation in the United States. Calculated over the 12 months ending August 2025, tariffs accounted for 10.9% of overall PCE inflation, thoroughly verifying the mechanism where tariffs equal inflation. Exchange rate fluctuations are simultaneously amplifying re-inflation risks as major manufacturing countries utilize monetary easing to cope with trade tensions, transmitting currency volatility and commodity price pressures globally.

The declining status of the dollar as a global reserve currency is weakening external demand for U.S. bonds. The dollar's share of global official foreign exchange reserves has dropped from around 71% at the beginning of this century to approximately 56% today, reaching a low point in nearly two decades. Central banks worldwide are accelerating asset portfolio diversification, with gold, the euro, and emerging market currencies gaining strategic importance. Woofun AI analysis suggests that marginal buying by foreign central banks is weakening, reducing demand support for long-term U.S. bonds. Even the Federal Reserve acknowledges that if market confidence in the U.S. ability to service debt or manage currency declines, demand for dollar assets will face further erosion.

The so-called "TACO" phenomenon, where markets crash after aggressive tariff announcements only to rebound when the White House softens its stance, has occurred repeatedly in 2025. Following a delay in tariffs on European goods, the S&P 500 rose by more than 2% in a single day, yet the 30-year Treasury yield soon returned close to 5%. The bond market signals clearly that tariff concessions cannot address fiscal deficits, inflationary inertia, or supply pressures, which remain the core determinants of long-term interest rates. Regardless of the policy path pursued under Josh Walsh, a steeper yield curve is the likely outcome.

Two primary paths illustrate this dynamic. Path 1 involves continuing interest rate cuts; while short-term rates fall with the Federal Funds Rate, long-term rates remain constrained by fiscal supply and inflationary premiums, resulting in a "bull steepening" pattern. Since the Federal Reserve began its rate cut cycle in September 2024, the 10-year yield has actually risen from 3.65% to a high of 4.79% in January 2025. Path 2 involves accelerating easing efforts under political pressure, which could spark doubts about central bank independence, leading to a re-pricing of inflation expectations and further increases in the term premium on long-term rates. Currently, the 10-year term premium has reached its highest level since 2011. Taking a one-sided bet on a significant decline in 10-year yields is highly unprofitable within the current macroeconomic framework. Trades targeting a steeper 2s10s or 5s30s yield curve offer a clearer advantage, supported by short-term rate cut expectations and long-term supply pressures, resulting in a significantly better risk-return ratio.