As markets step into the second half of the year, the U.S. inflation landscape is beginning July on uncertain footing. A mix of macroeconomic forces, market technicals, and policy expectations is creating a tug-of-war in investor sentiment, as inflation-linked assets struggle to find clear direction.

Weak Momentum Amid Lackluster Demand

The final session of June saw inflation markets under pressure as several converging factors weighed on pricing. The most notable market move was a decisive rally in duration, with the 10-year nominal Treasury yield convincingly falling below the 4.25% threshold. This renewed demand for duration was not mirrored in inflation-protected securities, which notably underperformed. The underperformance of TIPS (Treasury Inflation-Protected Securities) suggests a lack of conviction from buyers, particularly in an environment where real rates are being repriced amid shifting growth expectations.

Adding to the downward bias, the inflation index posted a minor contraction, with a 3 basis point move acting as a further drag. Energy markets provided no support either, as flat pricing across the sector removed what has recently been a stabilizing or even inflationary force. With nominal rates falling and breakevens (the difference between nominal and real yields) failing to find upside traction, the market’s appetite for inflation risk remains muted.

Looking Ahead: A Mixed Bag of Catalysts

The start of July brings with it seasonal patterns that historically support inflation markets. Typically, summer months can be more favorable for breakevens due to factors such as increased consumer activity, travel-driven energy demand, and less issuance of inflation-linked securities. However, this seasonality may not be enough to overcome the broader macroeconomic headwinds currently facing the market.

Two upcoming events are set to influence inflation expectations in the near term. First, a July 9 deadline looms for potential tariff adjustments – any escalation could inject inflationary pressure through supply chain costs and imported goods. Second, the potential passage of a new government spending bill may reinvigorate fiscal support, which could feed into inflationary expectations if it is viewed as boosting demand.

However, these tailwinds are tempered by growing unease surrounding the economic outlook. Recent data has signaled a cooling labor market, and forward-looking indicators suggest that growth momentum may be slowing. This weaker outlook has led to a risk-off tone in some corners of the market, with investors more willing to seek the safety of long-duration Treasuries than to take on inflation risk.

Breakevens Flat, Duration Firm

As trading opened in New York on Tuesday, breakeven inflation rates held steady at Monday’s closing levels. The 5-year breakeven sat at 230.25 basis points, while the 10-year and 30-year were priced at 228.00 and 226.00 respectively. These mid-levels reflect a cautious stance from market participants, as the strength in duration continues and energy prices tick slightly higher, particularly gasoline.

While the breakeven curve remains relatively flat, indicating a balanced but uncertain inflation outlook, the continued bid for duration hints at a market preparing for potential downside risks to growth. Until clearer signals emerge—either from labor market data, inflation prints, or policy shifts—the inflation market is likely to remain rangebound, defined more by uncertainty than conviction.

The U.S. inflation market enters July with mixed signals and competing narratives. Positive seasonal trends and the prospect of new policy actions provide a reason for cautious optimism, yet macroeconomic concerns and a hesitant investor base are keeping breakevens in check. For now, inflation remains in the crosshairs of an economy at a potential inflection point—making vigilance and adaptability key themes for market participants in the weeks ahead.