Rising 10-year US Treasury yields indicate slow impact of Fed rate cuts

The interest rate on the 10-year bond was 3.65 percent at the close of trading on Tuesday.

The divergence between a falling federal funds rate and a rising 10-year Treasury yield underscores the ultimate truth about markets: They are forward-looking, and investors had adjusted their interest rate forecasts long before the Fed’s decision.

Evidence of this is the fact that the yield on 10-year US Treasury bonds had already fallen by 125 basis points from its 5% peak in October, when it became clear that the Fed was finished with interest rate hikes.

According to Michael Reinking New York Stock Exchange The slight increase in the yield on 10-year US Treasury bonds, according to a senior market strategist, suggests that investors are confident about a possible soft landing for the US economy, as such a scenario would suggest that the Fed may not need to cut interest rates as much as the market previously thought.

“The Treasury market reaction was most telling yesterday,” Reinking said. “Bond markets have priced in a very aggressive rate-cutting cycle, suggesting some skepticism about the soft landing narrative. Yesterday’s aggressive action appears to have allayed some of those concerns, potentially leading to a less severe rate-cutting cycle.”

However, this also means that 10-year government bonds have been rising since the decision.

The move underscores that the Fed’s short-term lending rate is not having the impact on long-term interest rates — such as the 30-year mortgage rate — that many had hoped. And the rate cuts are unlikely to ultimately provide much relief for borrowers.

Mortgage rates were little changed on Wednesday, while short-term rates on high-yield savings accounts and money market funds fell within 24 hours.

The 10-year U.S. Treasury yield is a credit gauge for everything from home loans to corporate bonds. While businesses and consumers have seen some relief from lower rates since their October peak, it could be a while before they see further rate cuts.

Data from Freddie Mac shows that the average interest rate on 30-year fixed-rate mortgages is 6.2%, well below the high of nearly 8% but still above the 10-year average of about 4.4%.

For interest rates to continue to fall and provide relief to businesses and consumers in the form of lower borrowing costs, the yield on 10-year US Treasury bonds must fall – and that will probably only happen if the Fed takes a more dovish stance and continues its rate cuts.

“US Treasury yields have recovered to some extent following the Fed’s rate cut but may still face downside risks,” Inki Cho, financial markets strategist at Exness, said in an email to Business Insider, adding: “Dollar and Treasury yields may remain capped and decline as new rate cuts are expected in the coming months.”

Fed officials expect to cut rates another 50 basis points by the end of the year, followed by another 100 basis point cut in 2025. However, according to the CME FedWatch tool, markets are expecting deeper cuts this year and next.

Sonu Varghese, global macro strategist at the Carson Group, said the rate move was largely due to comments made by Fed Chairman Jerome Powell on Wednesday, in which Powell vigorously defended the economy and said the Fed would not tolerate a higher unemployment rate.

“The Fed is essentially putting a ceiling on the unemployment rate or a floor on the economy – it’s as if the strike price of the Fed put option went up,” Varghese told BI. “That’s positive for the economy, and in that case, yields should be higher. If the market doesn’t accept the Fed’s guidance and believes they are behind the curve, I think long-term yields would go down (pricing in higher recession risk).”