US Treasury Yields Rise Despite Rate Cuts… The Bond Market Doesn't Trust the Fed Right Now

Source: BlockMedia Original Title: Even with Rate Cuts, US Treasury Yields Rise… The Bond Market Doesn’t Trust the Fed Right Now Original Link: https://www.blockmedia.co.kr/archives/1016278 Despite the US Federal Reserve’s[image]Fed( rate cuts entering full swing, long-term Treasury yields are actually rising, leading to mixed interpretations among market participants. With the traditional correlation between rates and yields breaking down, some say “the bond market is questioning the Fed’s policy direction.”

The Fed began its rate-cutting cycle in September 2024 and has lowered rates by a total of 1.5 percentage points so far. As a result, the current US benchmark rate stands in the 3.75–4.00% range. The market expects an additional 0.25 percentage point cut at this week’s FOMC meeting, with two more cuts priced in for next year.

However, the 10-year US Treasury yield has risen more than 0.5 percentage points since the start of the easing cycle, now sitting around 4.1%. The 30-year yield has also climbed nearly 0.8 percentage points, defying expectations.

Widening Gap Between Short- and Long-Term Rates… Is Market Confidence Shaken?

Normally, when the benchmark rate is cut, long-term yields also fall. But the current situation is an exceptional trend rarely seen since the 1990s. Some interpret it as “a structural response due to weakened policy credibility or an oversupply of Treasuries.”

Jay Barry, head of global rates strategy at JPMorgan, said, “After the post-pandemic period of rapid rate hikes, the market had already priced in the Fed’s possible pivot,” adding, “Now that the cuts are aimed at a soft landing in an expansion phase, the drop in long-term yields could be limited.”

Political Pressure from Trump… “Fed Independence Could Be Shaken”

The market also points to the possibility of Donald Trump increasing his direct influence over the Fed as another uncertainty. Trump could nominate a close ally to lead the Fed after Jerome Powell’s term ends in May next year, with Kevin Hassett of the National Economic Council)NEC( mentioned as a leading candidate.

Steven Barrow, head of G10 strategy at Standard Bank, noted, “The Trump administration’s policy focus in a second term would be to artificially lower long-term rates, but simply appointing a political figure as Fed chair doesn’t mean long-term rates can be lowered,” warning, “If the Fed’s policy independence is undermined, it could actually fuel inflation and rising yields.”

Market’s Real Concerns: ‘Fiscal Soundness’ and ‘Policy Credibility’

Against this backdrop, the rise in ‘term premium’)term premium( is also notable. This is the risk premium investors demand for holding long-term bonds. According to the New York Fed, the term premium has risen by about 1 percentage point since the Fed began cutting rates last September.

Jim Bianco, head of Bianco Research, said, “What the bond market is truly worried about is that even as the Fed cuts rates, inflation is still running above the 2% target,” adding, “This reflects concerns over policy credibility.”

“Now a Normalized Rate Structure”… Comparison to the Greenspan Era

Some market participants compare the current situation to the mid-2000s “Greenspan Conundrum)Greenspan Conundrum(.” Back then, even as the Fed rapidly raised rates, long-term yields didn’t rise, blunting policy effectiveness. Now, the exact opposite is happening: the Fed is cutting rates, but long-term yields are rising.

Standard Bank’s Barrow interprets this as a “reversal in Treasury supply-demand dynamics.” In the past, a global savings glut fueled demand for bonds, but now, increased fiscal spending in major economies has led to a glut in bond supply, putting persistent upward pressure on yields.

Robert Tipp, chief investment strategist at PGIM Fixed Income, said, “The rate spike after the pandemic may simply be returning to ‘normal rate levels’ last seen before the financial crisis.”

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