Treasury yields rose again Wednesday, while US stocks struggled to recover after a tough trading day yesterday.
On Tuesday, the US Treasury’s auction of 10-year Treasury notes drew its highest yield in seven years: 4,68%. Benchmark 10-year yields reached their highest level since spring last year, hitting 4.73% on Wednesday.
Zooming in, the yields of 10-year bonds have increased since the Fed’s rate-cutting campaign began in September. They went from about 3.7% up to 4.7%. This is an unusual inverse correlation, when you compare the last 10 cycles of easing.
What is going on?
We are not in the typical cycle of easing. Rate cuts usually signal the approaching of a recession. This time, the Fed is lowering interest rates because central bankers believe inflation is sufficiently declining — or at least, they did.
FOMC members have increased their inflation expectations for 2024 from 2.6% up to 2.8%. Their median projections of cuts in the fed funds rate, therefore, has been reduced by 50 basis point. The futures market now prices in 95% of central bankers holding rates at their next monthly meeting.
Bond traders also react to the fact that the next (old) White House administration will be in place in less than 2 weeks. Bond prices and yields are moving in the opposite direction, so today’s drop is most likely due to concerns regarding Trump’s new tariff policies.
It’s an odd situation that may have a rational explanation. We’re still keeping a close eye on it. The latest Fed minutes — set to be released this afternoon — should also give us more insight.
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