Bond Market Pushback Takes Center Stage

Markets are almost fully pricing in another Federal Reserve rate cut this week, yet the US bond market continues to move in the opposite direction.

Instead of falling alongside policy easing, Treasury yields have been climbing since September 2024. Bloomberg notes that a divergence of this magnitude hasn’t appeared since the 1990s, raising questions about what today’s yield curve is really signaling.

What’s Really Driving Yields Higher

Analysts are split on what the rising yields mean. The main interpretations include:

• An unexpectedly strong economy: Some see higher yields as a sign that recession risks are receding.
• A return to pre-2008 dynamics: Others argue markets are simply reverting to an era when long-term rates moved independently of the Fed’s short-term cuts.
• Fiscal concerns resurfacing: A more cautious camp points to worries over swelling US debt levels and the return of “bond vigilantes” demanding higher yields.

Trump’s Rate-Cut Argument Runs Into Market Reality

The bond market’s behavior also contradicts former President Donald Trump’s repeated claim that faster and deeper rate cuts would quickly pull down long-term borrowing costs. Instead, the 10-year Treasury yield has risen nearly 50 bps to around 4.1% since the Fed began cutting, and the 30-year has climbed more than 80 bps. Rather than easing financial conditions, the rate-cut cycle has coincided with tighter long-term financing.

Credibility Questions for Powell’s Possible Successor

Attention is increasingly turning to the Fed’s long-run credibility as Trump prepares to nominate a successor to Jerome Powell once the chair’s term ends. Analysts warn that appointing a politically driven chair, or pressuring the current Committee into sharper easing, could lift inflation expectations. Instead of pulling yields down, such a shift might push them even higher and disturb broader financial stability.

Cuts Expected, Other Forces Also Steer the Bond Market

Markets expect a quarter-point reduction this week and two more cuts in 2026, bringing the policy rate toward 3%. Yet the bond market’s refusal to follow the Fed’s easing path suggests that short-term policy is no longer the dominant force at play. Rising fiscal deficits, expanding Treasury issuance, and questions about long-term inflation control now appear to be shaping yield behavior more powerfully than the Fed’s actions.