Everyone Thinks It’s Stagflation — But What If It’s Just a Flow Story?
U.S. Treasury yields are sending a message — but it might be the wrong one. A closer look suggests that structural distortions, not fundamentals, are driving the move.
U.S. 10-year Treasury yields are rising — and on the surface, it doesn’t make much sense. Growth is slowing, recession risks are building, and inflation is easing. Under normal macro conditions, that combination should pull yields down. Instead, they’re climbing — and many are pointing to stagflation risks. But what if this isn’t a macro signal at all? What if it's a temporary distortion driven by flow dynamics — or even a fiscal misread?
Here’s my view today: the U.S. budget outlook may actually be improving, not deteriorating. Between rising tariff revenues, initiatives to reduce government spending, and resilient tax receipts, the U.S. could be on track for a smaller deficit than the market assumes. If long-end yields fall, interest expense drops — reinforcing the fiscal improvement in a self-reinforcing loop. Yet markets may be overlooking this structural setup, focusing instead on near-term supply pressure.
One potential distortion: China may be quietly selling U.S. Treasuries. If they’re raising dollars to defend the yuan or reallocating reserves amid rising geopolitical tension, that flow can push yields higher — without signaling macroeconomic stress. Since tariffs are paid by U.S. importers (not China), and exports may be cooling, China could actually need fewer dollars. If markets are misreading flow-driven selling as inflation pressure, a sharp reversal in yields becomes likely once that selling is absorbed.
Meanwhile, oil prices have fallen materially — a force that could push CPI lower in the near term. And while new tariffs are being priced in, their inflationary effects likely won’t appear for several quarters, thanks to inventory stockpiling by importers. The short-term result? Disinflationary CPI prints at the very moment markets are pricing in persistent inflation. Add it all up, and the case for a long-end Treasury rally (i.e., falling yields) looks stronger than the current narrative suggests.