Treasuries Typically Rally Before a Long-Awaited Fed Rate Cut. Trading on That Is Still a Gamble.

People walk past the U.S. Treasury Building in Washington, DC. (Jemal Countess/Getty Images)

President Donald Trump keeps attacking the Federal Reserve’s decision to stay put on interest rates: Lower interest rates will “Let people buy, and refinance, their homes!” he wrote on social media Wednesday.

One problem: Although the Fed sets the short-term interest rate, the longer-term 10-year Treasury rate is controlled by market expectations of inflation, economic growth, and government spending. And since it is the 10-year rate that determines mortgage, credit card, and other rates across the economy, a Fed reduction of short-term rates might not translate to lower mortgage rates.

The good news, however, is that the 10-year yield has typically fallen ahead of Fed rate cuts that come six months or more after the previous cut, according to Ned Davis Research (NDR). The Fed most recently cut rates in December.

There have been seven such cuts and preceding yield declines, according to Joseph Kalish, chief global macro strategist at NDR: in January 1976, November 1976, July 1982, March 1986, July 1990, November 2002, and June 2003.

The 10-year yield declined a median 31 basis points 63 days before the rate cut; it dropped 81 basis points 126 days before; and it fell 56 basis points 189 days before. The yield declines are at times substantial and seemingly signal that investors will be able to benefit from a change in Treasury prices. (One basis point equals 0.01 percentage point.) Lower yields mean prices of existing Treasuries have risen, since yield and price move in opposite directions.

This means that the 10-year yield will likely have fallen in advance if the Fed decides to cut in September—nine months after its previous cut —or later.

But the bad news is that the research offers no clear answers as to where 10-year yield will land after a cut. In the same periods that follow after a rate cut, the 10-year yield has shown no clear tendency to decline or gain (see table).

Making matters worse, expectations for a September rate cut have fallen. Odds of at least a quarter-point cut through the Fed’s Sept. 17 meeting are now at 39%, compared with 58% a week ago, according to the CME FedWatch Tool. The lack of a clear consensus on whether the Fed will cut rates in September makes betting on a Treasury rally risky.

History isn’t always a perfect predictor of the future, but knowing historical trends and repeatable trends can help guide investor decisions.

Write to Karishma Vanjani at karishma.vanjani@dowjones.com.