Economy

progree

(12,358 posts) Thu Sep 25, 2025, 06:31 AM Thursday

When the Fed cuts their short-term interest rate, longer-term rates tend to fall, lifting bond prices, right????

Last edited Thu Sep 25, 2025, 10:08 AM - Edit history (1)

That's the conventional wisdom... But 2024 and 2025 so far paint a different picture

Yields continue to rise after Fed rate cut, similar to action seen after first cut of 2024, Seeking Alpha, 9/24/25

U.S. Treasury yields on Wednesday rose amid an extended bond selloff from last week following the Federal Reserve's first interest rate cut in nearly nine months. According to Bespoke Investment Group, the action was reminiscent of what was seen after the central bank's first rate cut last year in September.

The Fed last week cut its key policy rate by 25 basis points and projected more cuts for this year and ahead. However, Chair Jerome Powell called the decision a "risk management" move, and his messaging did not imply that this would be the start of an extended monetary policy easing cycle.

The benchmark U.S. 10-year Treasury yield (US10Y) has advanced 8 basis points since September 16, the day before the interest rate cut. Meanwhile, the shorter-end, 2-year yield (US2Y) has climbed 7 basis points.

"The rise in yields over the last week undoubtedly is at least partially a reflexive response to what happened after last year’s cut. Back then, yields were in a steady decline in the six months leading up to the cut, falling from 4.7% to just over 3.6%, but the cut rang the bell, and from there, rates retraced all their previous decline by year’s end," Bespoke said in a note on Wednesday.

In 2024, rates were cut from 5.50% to 4.50% in 3 steps, (0.50, 0.25, 0.25), in September thru December.
In 2025, we had a 0.25% rate cut, from 4.50% to 4.25%, on September 17, a week ago, so obviously not a lot of history.
(In the above, I'm using the upper end of the quarter-point range the Fed targets)

It sucks for those of us that follow the overwhelming consensus of financial planners and financial pundits to have a substantiall allocation to bonds (and other fixed income) in a mixed stock-fixed income portfolio, especially for those near, or in retirement, and maintain that allocation no matter what the market does or what one thinks it will do. Bonds have done horribly since 2021. The last I checked, their cumulative total returns over the last 4 years were generally single-digit positive, but far from keeping up with inflation (more than 20% cumulatively).

While it's nice that new bonds that we may buy have higher interest rates, those of us with substantial bond portfolios see those portfolios sink in inflation-adjusted value (purchasing power) as intermediate-term and longer-term interest rates rise.

Another thing is that, isn't the whole idea of cutting interest rates is to make borrowing costs cheaper to stimulate businesses to make investments? And for consumers to buy more cars and houses and all the things that go into furnishing new houses? So as to reduce or at least stabilize the unemployment rate? Well, if in the aftermath of Fed rate cuts, intermediate and longer term interest rates rise, that kinda squashes that, doesn't it?

I found when I looked in the wake of the 2024 Fed rate cuts, that the 1 year yield also fell, but yields (interest rates) on anything longer-term than that (2 year, 5 years, 10 years, 30 years) went up.