Why the Bond Market Isn’t Buying a Fed Rate Cut Anytime Soon
So here's what’s going on in the bond market right now—it’s a bit of a rollercoaster, but the story really boils down to two main things: short-term rates are stuck in place, and long-term yields are climbing higher. Let me explain it in plain terms.
The 6-month Treasury yield—basically a pulse check on where the market thinks the Federal Reserve is heading in the next few months—has been stuck just below the Fed’s current policy rate. That tells us something loud and clear: the market isn’t betting on any rate cuts from the Fed before September. That’s interesting, because this same 6-month yield was already pricing in cuts this time last year. Now? Nothing. Despite political pressure and the usual noise, the bond traders are saying, “Nah, not yet.”
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Now, let’s look at the long end of the curve—like the 30-year Treasury bond. That’s where things are heating up. Yields on these bonds have been flirting with 5%, which is significant. In fact, the 30-year yield has risen nearly a full percentage point since the Fed started cutting rates last fall. That’s not a minor shift—that’s the bond market pushing back.
Why is the long-term end getting nervous? Inflation. Specifically, inflation in services, which has been rising again. The market is also jittery about the flood of new government debt. The Treasury has been trying to keep long-term yields in check by issuing more short-term debt and even buying back older, low-interest long bonds at a discount. That’s helped a little, but clearly not enough to calm the nerves.
The 10-year Treasury yield, which influences mortgage rates, is hovering around 4.39%, and mortgage rates have been stubbornly high—still around 6.7% for a 30-year fixed loan. These are what you might call “real” mortgage rates, meaning after accounting for inflation, they’re back to what they looked like before the Fed’s ultra-loose policy years. Remember those rock-bottom mortgage rates during the pandemic? Those were fueled by the Fed buying up trillions in bonds. That era is over, and the housing market is still hungover from it.
So where does that leave us? Short-term, the Fed’s not moving. Long-term, the market is bracing for inflation and heavy debt loads. Mortgage rates aren’t coming down much, if at all, and bondholders are watching their portfolios take hits. The bond market is sending a clear message: inflation is a threat, and the Fed doesn’t have as much control over long-term rates as people like to think.
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