Why Did Long Rate Rise?

Since September, the Fed cut rates 100 bps, but 10-year yields rose ~100 bps. Why did this happen?

The market is signaling the Fed is not serious about inflation.

10-year yields during rate cut cycles since 1981 (the 100-year inflation and yield high).

2024 (black) is the biggest yield rise in a cutting cycle in at least 40 years.

However, the 2024 yield move (black) looks similar to the yield moves during pre-1981 rate-cutting cycles.

In the 1960s and 1970s, the market worried about inflation.

When the Fed cut, the market screamed "no," and long-term yields rose—like 2024 (black).

The dotted vertical line is the first-rate cut in September.

Look at what inflation expectations have done!

Gasoline prices (orange) have considerably influenced inflation expectations (blue) for five years. As gas prices slump, inflation expectations rise.

The post-September (rate cut) divergence below powerfully shows the market, indicating that inflation through 2029 is a problem.

This last chart shows a color-coded 2-year inflation breakeven rate, underscoring the idea that inflation expectations are acting like they were in the 1970s when the Fed cut.

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The red part of the series to the RIGHT shows the 67 trading days since the Fed started CUTTING. Inflation expectations are going straight up.

The red part of the series to the LEFT shows the first 67 trading days after the Fed started HIKING rates in 2022. Inflation expectations went straight down. Also labeled is when the Fed started hiking 75 bps per meeting in 2022 and how inflation expectations collapsed.

Restated

When the Fed cuts rates, the market does not think they are serious about inflation, and inflation expectations rise.

When the Fed hikes rates, they are vigilant about inflation, and expectations fall.

Pure 1970s reaction.

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If long-term yields rise due to fear that the Fed is too easy, then the Fed should hike rates or at least firmly announce that it is done cutting, which it did not on Wednesday.

In my opinion, they are letting political consideration cloud their judgment.

The Fed panicked over the Sahm Rule recession warning getting triggered in July and the 818,000 downward revision to payrolls in August.

Even though they downplayed the Sahm Rule and revisions in public, as Claudia Sahm did about her rule, I believe the Fed was politically terrified that these measures might be correct and how it would make them look if they were not responding.

So, they "made up" by cutting by 50 basis points in September, citing worries about the labor market (meaning the Sahm Rule and revisions).

In other words, they made a series of political moves in the summer and fall, and the bond market reacted by spiking long-term yields. Now, they are somewhat trapped.

In my opinion, the Fed should not have been cutting, but it is too afraid of Trump's social media accounts to say it is done cutting and might have to hike if inflation continues to increase.

Eventually, the market will force the Fed to adopt the correct policy and is not interested in how Trump will react.

Again, this is what happens when you start making political decisions.