The bond market’s reaction to the US Federal Reserve’s recent interest rate cuts has been described as unusual. US Treasury yields have been climbing even as the central bank lowers rates, a divergence some analysts say hasn’t been seen since the 1990s. This disconnect has sparked debate, with opinions ranging from bullish views suggesting confidence in averting recession, to more neutral stances indicating a return to pre-2008 market norms. Some believe investors are losing confidence in the US ability to manage its national debt.
President Trump’s vision of faster rate cuts leading to lower bond yields and reduced rates on mortgages and credit cards has not materialised, according to market reactions. The Federal Reserve, responsible for setting the nation’s monetary policy, began cutting its benchmark rate from a more than two-decade high in September 2024. Since then, the rate has been reduced by 1.5 percentage points, bringing it to a range of 3.75 per cent to 4 per cent.
Traders anticipate further easing, pricing in another quarter of a percentage point cut after the next meeting, and expect two more similar moves next year, potentially bringing the rate down to around 3 per cent. However, key US Treasury yields, which are benchmarks for borrowing costs for American consumers and corporations, have not followed suit. Since the Fed began easing policy, ten-year yields have risen nearly half a percentage point to 4.1 per cent, while 30-year yields are up over 0.8 percentage points.
Adding to the complexity is the potential for political influence, with Trump soon able to nominate a new Fed chairman. There are concerns the Fed might compromise its credibility by bowing to political pressure to ease policy more aggressively. This could backfire by fuelling already elevated inflation and pushing yields even higher.
