US Inflation Data Shows Tame Increase, Bond Yields End Higher

The latest US inflation data showed a tame increase in July, but bond yields ended up higher due to rising real yields. The US fiscal deficit for July came in at USD432 billion, which is high and adds pressure on long-end rates.

Elevated yields are seen as a degree of comfort, but the meandering war backdrop is not helping. Market break-evens have been discounting a benign inflation story for some time now, with break-evens comfortably below the 2.5% printed for core inflation.

The US fiscal deficit for July is running higher than fiscal 2025, and the cumulative fiscal deficit is now USD1.8 trillion. This could add credit pressure to long-end rates in the future.