(Bloomberg) — The last time U.S. Treasury bonds sold off so much as the Federal Reserve began cutting rates, Alan Greenspan orchestrated a rare soft landing.
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The two-year yield has risen 34 basis points since the Fed cut rates for the first time since 2020 on September 18. Interest rates rose similarly in 1995, when the Fed – led by Greenspan – managed to cool the economy without causing a recession. In previous rate-cutting cycles dating back to 1989, two-year rates fell an average of 15 basis points one month after the Fed began cutting rates.
Rising rates “reflect the reduced likelihood of recession risks,” said Steven Zeng, interest rate strategist at Deutsche Bank AG. “The data has come in quite strongly. The Fed could slow the pace of rate cuts.”
The latest rise in yields shows how a resilient US economy and buoyant financial markets are limiting Fed Chairman Jerome Powell’s options for aggressively lower interest rates. Interest rate swaps show that traders expect the Fed to cut rates by 127 basis points through September 2025, down from the 195 basis points priced in about a month ago.
Global bonds have fallen this week as investors weigh the potential of slower rate cuts, leaving total government bond yields up just 1.7% this year through Monday. This follows the 4.3% increase in T-bills over that period.
The sell-off continued mildly on Tuesday, pushing 10-year yields up about one basis point after rising 11 basis points on Monday. The recent rise has brought the benchmark yield to about 4.2%, compared with a 15-month low of 3.6% on September 17 – one day before the Fed cut borrowing costs by half a point.
On Tuesday, trading activity suggested sentiment remains bearish, with a series of block selling in 10-year bond futures. In the options market, one trade aims for the 10-year yield to rise to around 4.75% when options expire on November 22.
In 1995, the Fed cut rates only three times—from 6% to 5.25%—in six months after raising them sharply. Ten-year bond yields rose more than 100 basis points twelve months later after the first cut that year, while two-year yields rose 90 basis points.
This time, rising rates also reflect growing concerns that the Republican Party could take control of both the White House and Congress in the Nov. 5 election, potentially fueling the federal budget deficit and inflation.
