NEW YORK / LONDON (IT BOLTWISE) – Despite recent interest rate cuts from the Federal Reserve, Treasury yields continue to rise. This development reflects market concerns about inflation and the growing supply of bonds. Long-term interest rates, which are not directly influenced by the Fed’s short-term interest rates, respond to bond market dynamics and expectations of future inflation.
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The Federal Reserve’s recent interest rate cuts have not had the expected effect on Treasury yields. Instead, yields have risen across the maturity curve, reflecting market concerns about inflation and the growing supply of bonds. The 10-year Treasury note recently closed at 4.11%, up 48 basis points since the first rate cut in September 2024. This development shows that the bond market values long-term inflation risks more highly than the Fed’s short-term interest rate cuts.
The 30-year bond yield rose to 4.70%, also reflecting market expectations of future inflation and the supply of new bonds. These long-term returns are less influenced by the Fed’s short-term interest rates and more responsive to market conditions. The rise in yields despite interest rate cuts shows that the market is demanding higher compensation for the risks of inflation and bond supply.
Interestingly, the 6-month Treasury Yield, often seen as an indicator of the Fed’s next moves, predicted interest rates to stabilize in December. This suggests that the market expects the Fed to keep its interest rate policy unchanged for now to avoid further volatility in the bond market. This expectation is supported by the fact that short-term interest rates, such as the Effective Federal Funds Rate (EFFR), have fallen following the last rate cut.
Rising bond yields are also impacting mortgage rates, which have risen since the last rate cut. This poses a challenge for the property market as higher interest rates impact property affordability. The current situation is reminiscent of the period before the financial crisis, when mortgage interest rates were also in the 6% to 7% range. The combination of rising property prices and higher interest rates could put further pressure on the market.
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