Starting September 18, 2024: The Federal Reserve initiated a 50-basis-point rate cut cycle that day, with the 30-year Treasury yield at approximately 4.02%. However, it subsequently rose steadily, breaking through 5.2% early this morning, reaching its highest level since 2007. This indicates that long-term interest rates have not simply followed policy rates, but rather are re-incorporating persistent inflation, fiscal deficits, Treasury supply, and the term premium required to hold long-term bonds.
Long-term yields are jointly determined by expectations of future short-term interest rates and the term premium; if the market believes the Fed is easing too early, it could actually increase long-term inflation compensation. The New York Fed also breaks down Treasury yields into expected short-term interest rates and the term premium. Independently, what the bond market needs is not for the Fed to show panic, but clear evidence that policy tightening will outpace the accumulation of inflation risks. Even after holding rates steady at the July meeting and three committee members supporting a rate hike, long-term yields still rose to a 19-year high, reflecting market lingering doubts about the credibility of this assessment.
