When the Federal Reserve announced its first rate cut since 2020 last September, many market participants cheered. A loosening monetary policy seemed like the perfect catalyst for stock markets to continue their climb higher. And for equities, it delivered: the S&P 500 rose 3% into year-end following the announcement.
But the bond market had other plans.
How the Yield Curve Works
The short end of the yield curve is heavily influenced by the Federal Reserve, which sets monetary policy and directly drives shorter-term bond yields.
The long end of the curve, however, is shaped more by expectations for future economic growth and inflation.
This distinction is critical: a Fed rate cut doesn’t always translate to lower long-term yields.
Historical Patterns
Typically, 10-year Treasury yields show some weakness following a Fed rate cut but then take their cue from broader economic conditions:
In a recessionary environment: Yields tend to fall sharply as growth expectations are recalibrated downward.
In a non-recessionary environment: Yields generally stabilize or rise marginally, reflecting steady economic conditions.
But Not This Time
This time, the 10-year yield has defied expectations:
Instead of weakening post-cut, yields began to rise.
Four months later, they’ve climbed to historically unprecedented levels following a rate cut.
What’s Driving This?
The reasons behind the surge in long-term yields remain a topic of debate.
Potential drivers include:
Rising expectations of persistent inflation.
Market confidence in a stronger-than-expected economy.
Concerns over the government’s unsustainable deficit, signaling a “no-confidence” vote.
Implications for Global Markets
Regardless of the cause, this upward movement in long-term rates has effectively countered the Fed’s loosening of monetary policy, creating an environment of tightening financial conditions. Until this dynamic is resolved, it will likely remain a headwind for global risk assets.
