The 10-year Treasury yield was not going down, but was set to go, at a steady rate of 4.1 percent after the Federal Reserve reduced its rate by a quarter point this week. Although the Fed itself reduced its benchmark rate to 4.00 percent-4.25 percent, the higher yield rates on longer-term treasury have been, in fact, increasing, with the 10-year hitting a 2-week high. Economic growth prospects and inflation expectations, as well as issuing government debt, are being weighed by the investors against the backdrop of monetary policy easing.
Yields rise despite rate cut
U.S. Treasury yields rose on Friday as investors weighed the state of the U.S. economy and future monetary policy after the Federal Reserve on Wednesday cut interest rates for the first time this year, according to CNBC. The 10-year Treasury note yield gained more than 2 basis points to 4.127%. The 2-year Treasury yield added less than 1 basis point to 3.572%.
The intraday yield on both was the highest in two weeks, since Sept. 5. The 30-year Treasury bond yield added 2.5 basis points to 4.745%. One basis point is equal to 0.01%, and yields and prices move in opposite directions. According to MarketWatch data, the 10-year yield currently stands at 4.137%, down slightly from its previous close of 4.153%.
Economic factors drive yields higher
The backup in longer-dated U.S. Treasury yields is counterintuitive against the backdrop of sliding short-term rates. But investors in longer maturity debt weigh expectations not only for future short-term rates but also the likely course of economic growth, inflation, and government finances, including how much the U.S. has to sell to finance current spending and roll over existing debt.
“U.S. Treasury 10-yr yield continues to crawl higher, not lower, for the second straight day after the Fed cut. That syncs with rising GDP estimates and inflation moving slightly higher,” said Scott Wren, senior global market strategist at Wells Fargo Investment Institute. The Federal Reserve this week lowered its benchmark overnight lending rate by a quarter percentage point to a range between 4.00%-4.25%.
Fed signals measured approach
Fed Chairman Jerome Powell described the move as “risk management,” and policymakers indicated two more rate cuts are likely at their remaining meetings in late October and early December this year. Fewer jobless claims released in a weekly report on Thursday calmed investor concerns about a slowing U.S. economy and recent signs of cracks in the labor market.
After a spike in claims last week led to worries that layoffs are growing, the improved data helped support the view that the economy remains resilient. No economic data is set for release Friday, but investors next week will look to the August personal consumption expenditures index — the Fed’s preferred inflation gauge — for further insights into the pace of price pressures and the effect of tariffs on the U.S. economy.
Market dynamics at play
Although the Fed is reducing the rate, which should theoretically reduce the costs of borrowing throughout the yield curve, long-term bonds are affected by other factors. According to the MarketWatch figures, the 10-year yield has fluctuated between 4.125% and 4.153% in the recent future and the value of the 52 weeks results between 3.698 per cent to 4.817 per cent. The trading range used deviates around 4.1 percent, which is an indication of a middle ground where markets have yet to reach an equilibrium following the change of policies by the Fed.
The fact that the 10-year Treasury yield has been resting at an average of 4.1 percent since the adjusted Fed interest rate was lowered also demonstrates the principle of the complex forces in charge of the functions of the bond market. Whereas in the short term, rates directly correlate to the Fed policy, the utility of long-term yields reflects long-term economic expectations, such as the profile of growth, inflation, and partnership policy.