The U.S. Treasury market’s reaction to the Federal Reserve’s rate cuts has been highly unusual. By some measures, such a stark divergence—where Treasury yields climb even as the Fed eases—has not been seen since the 1990s. This anomaly has sparked intense debate, with interpretations ranging from optimism (signaling confidence in avoiding a recession) to neutral (a return to pre-2008 market norms) to the so-called "bond vigilante" explanation (investors losing faith in the U.S. ability to manage ballooning debt).
Since the Fed began cutting rates in 2024, the 10-year Treasury yield has steadily risen. One thing is clear: the bond market disagrees with former President Trump’s assertion that faster rate cuts would lower Treasury yields, thereby reducing borrowing costs for mortgages, credit cards, and other loans. With Trump poised to replace Fed Chair Jerome Powell with his own appointee, another risk looms—political pressure could force the Fed into aggressive easing, undermining its credibility and potentially backfiring by fueling already-high inflation and pushing yields even higher.
Steven Barrow, head of G10 strategy at Standard Bank, noted: "A core goal of a second Trump term would be to suppress long-term yields. But installing a political figure at the Fed won’t magically lower bond yields."
The Fed has cut rates by 150 basis points since September 2024, bringing the federal funds rate to 3.75%-4%. Traders fully expect another 25-basis-point cut this Wednesday, with two more anticipated in 2025, potentially lowering the benchmark to 3.00%-3.25%. Yet key Treasury yields—critical benchmarks for consumer and business borrowing costs—have not fallen. Since the easing cycle began, the 10-year yield has risen nearly 50 basis points to 4.1%, while the 30-year yield has jumped over 80 basis points.
Historically, long-term yields move in tandem with Fed rate adjustments. Even during the two non-recessionary easing cycles of the past four decades (1995 and 1998, each featuring 75-basis-point cuts), the 10-year yield either declined or rose far less than in the current cycle.
Jay Barry, JPMorgan’s global rates strategist, attributes this to two factors: First, the Fed’s aggressive pandemic-era hikes led markets to price in easing prematurely, peaking yields in late 2023 and dulling the impact of actual cuts. Second, the Fed’s bold easing amid elevated inflation has reduced recession risks, capping yield declines. "The Fed aims to sustain this expansion, not end it. That’s why yields haven’t dropped sharply," Barry explained.
Others point to the term premium—the extra compensation investors demand for holding long-term bonds against risks like inflation or fiscal deficits. The New York Fed estimates this premium has risen nearly 1 percentage point since the easing cycle began, dominating yield movements.
Jim Bianco of Bianco Research sees this as a warning: bond traders fear the Fed is cutting too aggressively with inflation stubbornly above 2% and the economy defying recession forecasts. "The market is genuinely worried policy has gone too far," he said, adding that further cuts could send mortgage rates "vertical."
Concerns also persist that Trump—who has shown less deference to Fed independence than his predecessors—may pressure policymakers to keep cutting. Kevin Hassett, a Trump loyalist and former White House economic adviser, is a betting-market favorite to succeed Powell in May.
Ed Harrison, Markets Live strategist, argued: "If rate cuts boost growth expectations, they won’t lower yields but raise them. In many ways, we’re reverting to a normal rate regime—2% real returns plus 2% inflation targeting equals a 4% floor for long-term yields. Stronger growth would only push it higher."
Still, broader bond markets remain stable. The 10-year yield has hovered near 4% for months, while breakeven inflation measures—key gauges of inflation expectations—show no signs of panic. Robert Tipp, PGIM’s fixed-income strategist, likened this to a return to pre-financial-crisis norms after an era of artificially low rates.
Standard Bank’s Barrow drew parallels to the "Greenspan Conundrum" of the early 2000s, when long yields stayed low despite Fed hikes. Then-Fed Chair Ben Bernanke later attributed this to foreign savings flooding Treasuries. Today, Barrow noted, the dynamic has reversed: excessive government borrowing globally has turned a savings glut into a bond supply glut, structurally pressuring yields upward. "Long-term yields may be stuck in a no-fall zone. Ultimately, the Fed doesn’t set long rates," he concluded.
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