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Economic Commentary

Weekly Economic Commentary

May 26, 2026 by Jeanette Garretty, Chief Economist

Have rising bond yields forced action on the Strait of Hormuz when rising consumer inflation rates couldn’t? If so, it wouldn’t be the first time that bond markets flexed their muscles, and it won’t be the last. Many observers believe that a moderation of the sweeping and sometimes nonsensical US tariffs announced on “Liberation Day” last April was attributable to an alarming spike in the 10 yr. Treasury yield. The 10 yr. Treasury yield reached above that level last Tuesday with a speed and effect very similar to the one in April 2025. There are lots of downsides to higher bond yields, not the least of which is the rising cost to the federal government of financing the expanding budget deficit. According to the Center for a Responsible Federal Budget (crfb.org), if the 30 yr Treasury yield and the 10 yr Treasury yield  were to remain at or above the 5.2% and 4.7% they respectively reached last week(with other rates moving in tandem),  federal government interest expense would become the second largest government “program” in FY2027, exceeding Medicare and surpassed only by Social Security.  At the same time, higher bond yields actually have the nasty habit of becoming quite visible to the American consumer via rising mortgage rates, higher car payments and elevated credit card interest rates. The ultimate reason governments fear the messages delivered by bond markets, however, may be that bond markets are large, global, and faceless, reducing the ability of governments to control the message or demonize the messenger. After so many false starts, it will be interesting to see how bond markets react to the latest news from the Strait of Hormuz and how quickly bond yields retreat to more normal levels — it may be that they fall just as rapidly as they rose, while claiming another victory for the bond vigilantes. 

Data to Watch 

  • US Personal Consumption Expenditures (PCE) Index for April, released Thursday, May 28 
  • US Personal Income and Personal Spending for April, released Thursday, May 28 
  • US Wholesale and Retail Inventories for April, released Friday, May 25 

Suggested Reading 

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