The Federal Reserve has just cut its benchmark lending rate by a quarter percentage point. Now, that rate is a window from 4.00% to 4.25%. This is the first rate cut of the year. As Fed Chair Jerome Powell recently stated, this deliberate action is intended to mitigate risks to the economy. He pointed to the softening labor market as the number one factor driving this decision.
Although the Fed has loosened monetary policy as expected, the bond market responded in the opposite fashion. Over that time period, the yield on the 10-year Treasury increased to a stunning 4.145%. This increase comes after a short fall below 4% at the start of this week. This unfortunate development exemplifies this disconnect between short-term monetary policy movements and long-term borrowing costs.
Powell emphasized the unique challenges of the current labor market. He implied that the Fed’s decision was squarely about prioritizing risk management. “It’s not the journey, it’s the destination,” he explained, indicating a focus on long-term economic stability rather than short-term fluctuations.
The 30-year Treasury yield rose to about 4.76%. This increase comes from a low of 4.604% earlier this week. Longer-term yields are increasing despite the Fed cutting rates 450 bps (in 75 bps increments) since early 2024. That implies that bond investors are fearful and unsure of future economic prospects.
Chris Rupkey, chief economist at FWDBONDS, noted that bond investors are grappling with broader economic signals as they attempt to make informed decisions. He said some of the aggregate yield increases can be explained by the drop in unemployment filings. This sharp correction likely contributed to turbulent investor psychology on the sustainability of any capitalist recovery.
Meanwhile, Peter Boockvar, chief investment officer at One Point BFG Wealth Partners, commented on the market’s reaction to the Fed’s rate cut. As he explained, bond traders viewed this action as an opportunity to “sell the news.” They had been encouraged by recent positive progress in bond pricing. Boockvar underscored the importance of global factors on domestic yields. He urged a note of caution against aggressive rate cuts given persistent inflationary pressures.
“We don’t think you should be aggressively cutting interest rates with inflation stuck at 3%,” Boockvar stated, underscoring the complex interplay between inflation and interest rates that complicates the Fed’s decision-making process.
In response to the Fed’s “cut,” stock markets soared to all-time highs. Bond investors were deeply unsatisfied. They were disappointed with the limp reassurance they had desperately asked for in exchange for the central bank’s dramatic decision.
Fred Imbert remarked on the current sentiment within the bond market, stating, “Unfortunately, the bond market only really embraces bad news.” He further noted that the atmosphere has shifted towards “not just bad news… terrible news,” indicating a growing sense of uncertainty among investors.
The combination of increasing long-term Treasury yields in the face of what appears to be imminent Fed rate cuts creates a lot of uncertainty about future economic prospects. As markets have started to respond to these changes, investors are now forced to understand the implications of a multitude of possible future scenarios and position themselves accordingly.