The Compound: Here’s the Real Reason Treasury Yields Are Rising

Since the Federal Reserve cut interest rates in September, an unusual thing has happened in markets. Bond yields have trended higher, not lower. The 10-year U.S. Treasury bond rose from 3.6% to over 4.2%, a massive one-month move.

30-year fixed rate mortgages rose back to 7%, after going for closer to 6.5%. Since the Federal Reserve is cutting rates, these rates should be going down, not up. This could be the result of several scenarios.

First, it’s possible that the move is simply the market gearing up for a bigger move lower. This kind of initial move in the opposite direction occurs often in the stock market.

Second, bond market vigilantes could be demanding higher rates to allow the government to borrow money from them. Given rising debt levels overall, and the $1 trillion in debt payments from the U.S. Treasury alone, that’s likely possible.

Third, many traders bet on a recession in 2022 and 2023. With signs of the economy remaining strong, this trade is being unwound, pushing yields higher for now as investors shift to still-rising stocks.

Fourth, investors may simply be betting on both economic growth and higher-than-desired inflation in 2025.

For now, investors looking to lock in high bond yields still have a window of opportunity. And cash continues to generate a relatively high yield.

To get the real reason why bond yields have ticked higher in the past month, click here.