Bloomberg reports:
The bond market’s reaction to the Federal Reserve’s interest-rate cuts has been highly unusual. By some measures, a disconnect like this, with Treasury yields climbing as the central bank lowers rates, hasn’t been seen since the 1990s.
What the divergence indicates is a matter of heated debate. Opinions are all over the place, from the bullish (a sign of confidence that recession will be averted) to the more neutral (a return to pre-2008 market norms) to the favorite culprit of the so-called bond vigilantes (investors are losing confidence the US will ever rein in the constantly swelling national debt).
But one thing is clear: the bond market isn’t buying President Donald Trump’s idea that faster rate cuts will send bond yields sliding down and, in turn, slash the rates on mortgages, credit cards and other types of loans.
With Trump soon able to replace Chair Jerome Powell with his own nominee, on top of everything else is the risk of the Fed squandering its credibility by caving to political pressure to ease policy more aggressively — which could backfire by fanning already elevated inflation and pushing yields higher.
… The Fed started pulling its benchmark rate down from a more than two-decade high in September 2024 and has since cut it by 1.5 percentage points to a range of 3.75% to 4%. Traders see another quarter-point cut after the next meeting on Wednesday as virtually assured and are pricing in two more such moves next year, which would bring its rate to around 3%.
Yet, key Treasury yields — which serve as the main baseline for the borrowing costs paid by American consumers and corporations — haven’t come down at all. Ten-year yields (^TNX) have risen nearly half a percentage point to 4.1% since the Fed started easing policy and 30-year yields are up over 0.8 percentage point.