To The Moon

The last time U.S. Treasuries faced such a sharp sell-off following a Fed rate cut, Alan Greenspan was engineering a rare soft landing.

Since the Fed’s first rate cut on September 18, 2020, the two-year Treasury yield has surged by 34 basis points. In 1995, under Greenspan, the Fed successfully cooled the economy without a recession, with yields also rising sharply. In earlier cycles before 1989, the two-year yield typically dropped 15 basis points a month after the first cut.

Strong Economy Limits Fed's Aggressive Cuts

Deutsche Bank’s Steven Zeng remarked that rising yields indicate reduced recession risk, “The data is strong, and the Fed might slow the rate cut pace.”

This yield rise shows the resilience of the U.S. economy, which is limiting Fed Chair Powell’s options for aggressive easing. Rate swaps now show traders expect the Fed to cut 128 basis points by September 2025, down from 195 basis points a month ago.

Global Bonds Decline as Treasury Yields Surge

Global bonds have slid this week, as investors assess slower rate cuts. U.S. Treasury total returns have risen just 1.7% this year, lagging behind a 4.3% increase in other bonds. The recent rally has pushed the 10-year yield from a 15-month low of 3.6% on September 17 to around 4.2%, just before the Fed's 50-basis-point cut.

On Tuesday, 10-year Treasury futures saw heavy sell orders, while options traders bet that the 10-year yield could hit 4.75% by November 22. The ICE BofA Move Index, which tracks U.S. Treasury volatility, has risen to its highest level this year.

1995's Rate Cut Parallels and Election Concerns

In 1995, the Fed cut rates three times in six months, from 6% to 5.25%. A year after the first cut, the 10-year yield had jumped over 100 basis points, and the two-year yield rose by 90.

This year, rising yields also reflect concerns that the Republican Party could win control of the White House and Congress in the upcoming November 5 elections, raising fears of higher deficits and inflation.