The Fed cut rates, but the yield on the 10-year T-note is up

When the Federal Reserve cut its federal funds target rate by half a percentage point Wednesday, the goal was to make it cheaper to borrow money across the economy and thereby stimulate growth.

But since then, something a little unexpected has been happening to the yield on the 10-year Treasury note, essentially an IOU the government issues for a 10-year loan. That interest rate is set by buyers and sellers in the bond market, and it has actually gone up since the Fed announced its cut.

This is significant because the yield on the 10-year is not just the interest rate the government pays on its debt.

It’s also the benchmark for many other interest rates, including mortgages, auto loans and corporate borrowing. So when it increases, it is not cheaper to borrow money across the economy and thereby stimulate growth.

But there are reasons that the 10-year Treasury yield is going up when we might expect it to go down.

When Bill English was secretary of the Fed’s rate-setting committee in the early 2010s, he and a coworker had a kind of ritual. As soon as the policymakers announced their decision on interest rates, the pair would huddle in front of a computer and watch the numbers change in the bond market.

“We would have a nickel bet on which way rates were going, and it didn’t really matter which side you had on the bet because, you know, you were surprised most of the time,” English said.

Historically, it’s actually pretty normal that the interest rate on 10-year Treasury notes doesn’t instantly mirror the Fed’s actions, especially since Chair Jay Powell has basically been telling investors that the central bank was going to cut rates.

“A lot of it is already priced in,” English said. In other words, the rate changed in anticipation of the Fed’s move rather than after it happened.

It’s also worth remembering that the Treasury bond market is a market that responds to supply and demand, specifically a market for a very safe, very boring asset.

When investors feel good about the economy, demand for those safe, boring Treasuries typically goes down, which drives up the yield to attract more buyers.

In fact, investors who expect a soft landing for the economy may lose interest in government debt, with its typically low interest rates, and look into something more exciting, like stocks.

“The perceived risk of recession has actually gone down after the Fed cut rates a little bit more aggressively than the market was expecting,” said Jamie Patton at investment firm TCW. So if investors aren’t expecting a recession, that gives yields room to bounce back up a tad.

To be clear, just because the interest rate on the 10-year note hasn’t budged much, it doesn’t mean the cost of borrowing across the real economy won’t drop, according to Jonathan Wright, an economist at Johns Hopkins.

“You’ve already seen mortgage rates come down a little bit, but they’re still very, very high,” he said. “I think you will see a substantial decline in fixed-rate mortgages.”

Wright said that’s because mortgage rates have tended to track the two-year T-note, which the Fed has more influence over.