US Bond Market Faces Inflation Concerns Amid Record TIPS Levels
Washington, D.C., Saturday, 6 September 2025.
Investor concerns grow as inflation expectations reach a decade high, sparking fears of underpriced long-term fiscal risks in the bond market.
Record TIPS Levels Reflect Rising Inflation Concerns
As of August 27, 2025, inflation expectations, gauged by Treasury Inflation-Protected Securities (TIPS), surged to 2.435%. This marks the highest level in over a decade, indicating growing concerns among investors about inflationary pressures within the U.S. economy [1]. Such an increase in TIPS highlights the market’s anticipation of sustained inflation, which could pose significant challenges to the bond market’s stability.
Underpricing Long-term Fiscal Risks
A segment of the investment community believes that the U.S. bond market is not adequately pricing in the long-term fiscal risks. The apprehension arises amidst recent shifts in market dynamics, including pressure from the White House on the Federal Reserve to lower interest rates, potentially undermining the central bank’s autonomy [1][2]. This scenario is often described as a ‘boiling-the-frog’ moment, where gradual policy changes may lead to adverse economic outcomes [1].
Impact of Recent Market Movements
Earlier this week, U.S. bond markets experienced significant sell-offs due to mounting concerns over global fiscal health, only to see a rally on the back of weaker economic data [1]. The U.S. Treasury term premium, a critical measure of investor compensation for holding long-term debt, rose to 84 basis points on September 5, 2025, reaching its highest point in over three months [1]. This increase signifies heightened risk perception among investors.
Broader Economic Implications
The implications of these market movements extend beyond the bond market, affecting the broader economic landscape. Rising Treasury yields, driven by inflation concerns, reflect investor anxiety over fiscal stability and potential interest rate hikes [3]. If persistent inflation leads to prolonged periods of high interest rates, it could dampen economic growth and increase borrowing costs for both businesses and consumers [3].