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Markets scale back near term rate hike bets as yields stay higher
ETF Trends links the softer rate outlook to recent weak jobs, retail sales, and cooling inflation, while highlighting Treasury supply and a $2.1 trillion projected fiscal 2026 deficit as support for longer term yields.
ETF Trends says markets are largely trimming expectations for a near term U.S. Federal Reserve rate hike, aligning with the view that July’s weak jobs report, an underwhelming retail sales report, and continued softening in monthly inflation data give the Fed room to stay patient over the coming months.
The outlet argues that even if the Fed remains cautious, interest rates may stay higher than investors saw in the post Global Financial Crisis era. It notes that fixed income investors can still benefit from higher starting yields, while also warning that less certain forward guidance from Fed Chair Kevin Warsh could raise the term premium investors demand for longer dated bonds.
ETF Trends also points to structural factors that could keep longer term yields elevated. It cites the Congressional Budget Office estimate of a $2.1 trillion federal budget deficit for fiscal 2026, up from $1.9 trillion projected earlier this year, and says persistent deficits above 6% of GDP with unemployment still low are historically unusual, increasing the need for Treasury issuance.
On the supply side, the outlet says a recent Treasury Department announcement on increased buybacks of longer duration bonds may have limited long term impact, because additional shorter maturity issuance could fund the repurchases. It adds that corporate bond issuance tied to artificial intelligence has already reached nearly $500 billion in 2026, with Morgan Stanley projecting a full year total near $570 billion, more than double last year’s pace.