Bucking trends and spitting out confusing, counterintuitive outcomes have been hallmarks of the COVID economy and the post-pandemic years. The resilience of the American consumer is probably the most well-known example. But bond markets, reacting to a global realignment on trade and rattled by uncertain expectations of American governance, have introduced another puzzling inconsistency.
Last September, the US central bank started easing rates, with a sizable pause through most of 2025, peeling back a total of 1.5 percentage points. This afternoon, the Fed is widely expected to reduce rates by another quarter point as part of a monetary campaign to shift policy from a restrictive stance to a more neutral one. Traders are pricing in another two cuts in 2026. Such moves would ordinarily prompt Treasury yields to fall as they move in the direction of Fed policy. But analysts say a host of factors have kept yields from dropping further, with varying explanations that are in turns bullish and ominous.
Higher yields can be felt throughout the economy, as they set the cost of borrowing. The Trump administration has set out to bring them down, with the goal of lowering the mortgage rates, making business loans more affordable, and spurring economic activity. But investors have been grappling with shifts in trade policy and the prospects of an ever-widening national debt. Yields move in the opposite direction of prices, so when a sell-off intensifies, yields increase, reflecting heightened concerns that buying government debt carries more risk.
Historically, deficits have had little impact on Treasury yields, owing largely to American economic dominance and the United State’s role as issuer of the world’s reserve currency. But the consequences of a new, more volatile trade regime may be shifting those dynamics. Higher yields reflect investor demand for greater compensation for higher deficits and mounting policy risks. What’s more, the market may be expressing some disagreement with the Fed’s expected decision to continue cutting, even as inflation remains elevated.
Optimistic explanations contend that the divergence points to confidence that a recession will be averted. Treasury Secretary Scott Bessent told CBS’s Face the Nation this weekend that “the bond market just had the best year since 2020 and now we are working on inflation, and I expect inflation to roll down strongly next year.”
Other observers say that elevated yields reflect a return to the environment before the 2008 financial crisis, with super-low interest rates registering as a historical anomaly.
But as this easing cycle has shown, there’s no guarantee the Fed’s next slate of rate cuts will actually bring down the rates that matter.
