The 30-year Treasury yield rose 19 basis points since Sept, 16 and the Fed cut interest rates by 75 basis points in 2025.The Effective Federal Funds rate (EFFR), which the Fed targets with its policy rates, had dropped by 75 basis points by mid-December.
According to Wolf Street, the spread between the 30-year Treasury yield and the EFFR has reached 120 basis points. Since October 2023, the 30-year yield has breached the 5%-line several times.
The 30-year Treasury yield reacts to bond-market issues, and Wolf Street said that as expectations of future inflation and expectations of supply of new bonds that have to be absorbed; it is not overly influenced by the Fed’s short-term policy rates.
But, Wolf Street said, the short-term yields react to the Fed’s current and expected future policy rates and that those yields have dropped roughly along with the Fed’s rate cuts. With long-term yields rising and short-term yields falling, Wolf Street said the yield curve steepened sharply over this period and has almost uninverted.
Treasury yields from one month to six months are right at or a little above 3.60%, with the one-month yield at 3.66% and the 6-month yield at 3.59% in mid-December.
The yield curve sharply steepened since Sept. 16, just before the Fed’s first rate cut, Wolf Street reported.
Yield is Still Inverted
But the yield curve is still inverted in the three-month through three-year range, with those yields being lower than the one-month yield, Wolf Street said That’s the sag in the middle. But it has become shallow, and almost straightened out, from the deep trench it had formed previously.
The shallow sag in the middle indicates that the bond market has walked back expectations of rate cuts next year, Wolf Street said.
According to Wolf Street, the bond market faces a problem. It said that the Fed cut rates three times in 2025 while inflation accelerated.
CPI inflation, when last measured, was 3%, which was the September reading. Wolf Street said that the only reason it wasn’t higher was the outlier plunge in Owners Equivalent of Rent (OER), the largest CPI component, weighing 26% in overall CPI, 33% in core CPI, and 44% in core services CPI (my analysis is here).
Something went awry, Wolf Street said, but CPI was cobbled together by hastily recalled staff during the shutdown.
Cutting interest rates in this inflationary environment can spook the bond market, Wolf Street reported. The market already isrried about the onslaught of new supply of Treasury securities to fund the ballooning government deficits. And the market fears a lackadaisical Fed when inflation is out of the bottle.
Inflation destroys the purchasing power of long-term bonds, Wolf Street said, and the yield must be high enough to compensate investors for the destruction of purchasing power, and for the other risks investors are taking.
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