In the September FOMC meeting, the Federal Reserve initiated its first easing cycle in nearly five years by reducing the federal funds target rate by 50 basis points to a range of 4.75–5.0%. This was followed by an additional 25-basis-point cut in November, bringing the target range to 4.50–4.75%. Contrary to expectations, however, the yield on the 10-year Treasury bond has not declined alongside these rate cuts. Instead, it has surged, surpassing 4% in early October and reaching as high as 4.4% in early November—a striking increase of nearly 75 basis points in under two months.
The current divergence between the 10-year Treasury yield and the Fed’s policy rate is noteworthy. Over the past 35 years, there have been seven easing cycles, including the current one. Analyzing the 10-year Treasury yield’s behavior during the initial 55 days of these cycles, the current yield increase is unprecedented, marking the largest rise recorded during an easing cycle. This exceptional movement demands attention.
What might this unusual yield trend signal? Looking back at prior easing cycles, only those in 1995 and 1998 show a comparable pattern. In both instances, the Fed successfully achieved a soft landing for the economy through moderate rate cuts—three reductions of 25 basis points each, totaling a 75 basis-point cut.
If the current long bond yield behavior reflects potential central bank policy direction, this easing cycle could similarly be short-lived. The Fed may adopt a “higher for longer” stance after an initial phase of moderate cuts, mirroring the 1995 and 1998 cycles. This suggests the Fed may be banking on a stable, soft-landing economy, forgoing the need for aggressive policy adjustments.
That said, potential economic policies from the incoming Trump administration, such as tariffs and tax cuts, could reignite inflationary pressures. In such a scenario, the Fed might even consider reversing its stance to resume rate hikes—an outcome that would likely prove challenging for the stock market.
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