They say inflation is cooling. The market claps. Yields dip. And just as quickly, they climb right back up. Over and over again. It is not confusion. It is the new reality. And many still do not get it.
Soft inflation used to mean celebration. It meant the Fed could cut, the economy was easing gently, and risk was falling. But not this time. Not in this cycle. Now, soft inflation means something very different. It means the economy is slowing. It means rate cuts are coming. And most importantly, it means Washington will open the floodgates again.
The pattern is now predictable. A weak CPI number hits. Bond traders price in cuts. Stocks cheer. But behind that optimism is the machine that never sleeps: the deficit. More cuts mean lower borrowing costs for the government. That signals more spending. More fiscal firepower. More programs, more promises, more debt. And more Treasuries flooding the market.
This is why yields rise even as inflation falls. Because every drop in inflation pulls the government deeper into spending mode. They see rate relief and take it as a green light to borrow more. The Congressional Budget Office sees the path and raises its estimates. The Treasury pumps out more debt. The market sees this and says: if you are going to flood us with supply, we are going to demand a higher price to hold it.
And that higher price is the yield.
The deficit has crossed 2 trillion dollars annually, even with unemployment under 4 percent. That used to be a war-time number. Now it is baseline. And it is financed entirely with bonds. So when soft inflation signals more spending, investors prepare for more supply. Not just this year. For years. And that is when the premiums rise. Not because of fear. But because of volume. Too many bonds chasing too few buyers. Too much risk chasing too little discipline.
It gets worse. Slower growth also means slower government income and more deficit spending. That adds fuel to soaring yields because investors demand more premium for such risk. Weak revenue, stronger outlays. That’s how credit stories unravel.
Now look at the other side. When inflation runs hot, the opposite happens. The Fed steps back. No cuts. Maybe more hikes. That pressure restrains the spending impulse. It forces political hesitation. It dampens the deficit engine, at least at the margin. Bond issuance slows. Dollar creation slows. And suddenly, the market breathes. Yields level off or even come down slightly. Not because inflation is tame, but because the dollar looks less diluted.
It is not the inflation number that drives yields. It is what the inflation number triggers in policy. Weak prints now scream stimulus ahead. Strong prints mean brakes. That is the paradox. And that is what keeps yields pinned at the highs.
This is the tightrope. Every time the market begs for cuts, it is unknowingly begging for more debt. Every time it prays for soft CPI, it sets the stage for another round of deficit blowouts. And that is why the 10-year does not fall. It knows what is coming.
The Treasury is on track to issue over 1 trillion dollars in new debt per quarter. Foreign demand is fading. Domestic demand is cautious. Every buyer now wants protection. They want premium. They want compensation for the political instability, the endless spending, the uncertain path ahead.
And unless Washington slams the brakes on borrowing, this cycle will repeat. Weak data. Rate cut bets. More borrowing. More debt. Higher yields.
This is not a guessing game. It is supply and demand. And the Treasury is the biggest issuer on Earth. The buyers are not fooled anymore.