Bloomberg reports:
The bond market’s reaction to the Fed’s rate cut was highly unusual. By some measures, rising Treasury yields as central banks cut interest rates is a disconnect not seen since the 1990s.
What this disagreement illustrates is a hotly debated issue. Views range from bullish (a sign of confidence in averting a recession) to neutral (a return to pre-2008 market normalcy) to the so-called bond vigilantes’ favorite culprit (investors are losing confidence in how the U.S. will control its ballooning national debt).
But one thing is clear: The bond market is unconvinced by President Donald Trump’s argument that faster rate cuts would cause bond yields to slide, slashing interest rates on mortgages, credit cards and other types of loans.
With Trump soon able to replace Chairman Jerome Powell with his own nominee, the bottom line is that the Fed risks succumbing to political pressure and easing policy more aggressively, thereby squandering its credibility — which could backfire by exacerbating already high inflation and pushing yields higher.
…The Federal Reserve began cutting its benchmark interest rate from its high in more than two decades in September 2024 and has since lowered it by 1.5 percentage points to a range of 3.75% to 4%. Traders view another quarter-point rate cut after the next meeting on Wednesday as almost a certainty and expect two more such moves next year, which would take rates to around 3%.
However, key Treasury yields – the main benchmark for borrowing costs paid by U.S. consumers and businesses – are not falling at all. Since the Fed began easing policy, the 10-year Treasury yield (^TNX) has risen nearly half a percentage point to 4.1%, while the 30-year Treasury yield has risen more than 0.8 percentage point.
Read more here.