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Treasury Market Wobbles After Fed Rate Cut. We’ve Seen This Before.

Sep 19, 2025 12:10:00 -0400 by Martin Baccardax | #Markets

Bond investors fear a renewed acceleration in inflation. (NYSE)

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U.S. Treasury markets are starting to mimic action that took place last autumn, when the Federal Reserve embarked on a series of interest rate cuts that ultimately led to higher long-term borrowing costs.

The Fed’s outsized 50-basis-point cut in September 2024, which was followed by quarter-point reductions in November and December, triggered a selloff in longer-dated bonds that drove 10-year yields more than 100 basis points higher in less than four months.

That slump kept broader equity markets in check, as well, and although the S&P 500 finished 2024 with a 25% gain, it rose less than 3% from the time 10-year yields began to rise until the end of the year.

This year’s quarter-point reduction, described as a “risk management” move by Fed Chairman Jerome Powell, hasn’t yet stoked a similarly violent selloff. But looming inflation data, a potential government shutdown, and ongoing concerns tied to U.S. debt levels are likely to weigh on markets over the coming months.

The 10-year Treasury yield, perhaps one of the most important market-based interest rates in the world, was at 4.13% in late Friday trading. That is a 14-basis-point increase since the benchmark yield briefly dipped below the 4% level following Wednesday’s Fed rate decision.

Some of that move could be tied to concerns the Fed will focus more on weakness in the labor market, while allowing inflation pressures to build, as it determines its next policy move.

Powell is likely to address that concern when he speaks next week at an economic event in Providence, R.I.

“The market will look for more answers from Powell on the wisdom for cutting while we face unchanged expectations for persistently high inflation and unemployment amidst higher growth,” said Christian Hoffmann, head of fixed income at Thornburg Investment Management. “We have to ask if this is a paradigm shift.”

The Bureau of Economic Analysis will publish its key reading of the Fed’s preferred inflation gauge, the personal consumption expenditures price index, next Friday. Economists expect core prices, which strip out volatile components such as food and energy, rose to an annual rate of 3% in August, the highest since January 2024.

Bond investors fear a renewed acceleration in inflation as it erodes the present value of future coupon and principal payments. Persistent increases would see them demand a higher premium, which would, in return, result in higher government borrowing costs.

That is a key issue heading into the final month of the 2025 fiscal year in Washington, as the overall deficit is set to top $2 trillion, an 11% increase from the prior year. U.S. debt is also forecast to top $50 trillion by the middle of the next decade.

Rising 10-year yields are also an issue for the housing market, which remains stuck in low gear amid record-high prices, slow new construction and mortgage rates that keep homeowners reluctant to sell and refinance.

With all that is at stake from a bond market selloff, some investors are starting to focus on what is known as the “third mandate” for the Fed, on top of its task of ensuring maximum employment with stable inflation: moderate long-term interest rates.

“Conventional wisdom has been that this is a function of the Fed policy,” said Bank of America’s rates research team, led by Ralf Preusser. “Feds in the future may have a different interpretation and see the third mandate as a way to achieve alternative aims, such as stimulating the economy and supporting the housing market.”

How markets would react to that kind of direct intervention is another question.

Write to Martin Baccardax at martin.baccardax@barrons.com