From Wolf Street, January 11:
30-year Treasury bonds sold at auction on Friday at highest yield in at least 16 years despite Fed’s 100 basis points in rate cuts.
Since the Fed’s 100 basis points in rate cuts, the 10-year Treasury yield has risen by 114 basis points, including by 9 basis points on Friday, to 4.77%, the highest since November 2023, upon news of a continued solid labor market in an economy that is growing substantially faster than the 15-year average growth rate, with inflation re-accelerating in the wings. And seeing these upside risks to inflation, the Fed is gingerly shifting back into its wait-and-see mode.
The 20-year yield rose to 5.04% on Friday, as the Treasury Department sold 30-year bonds at auction with a yield of 4.91%, the highest auction yield since before the Financial Crisis. And a daily measure of mortgage rates rose to 7.24%.
The Effective Federal Funds Rate (EFFR), which the Fed targets with its policy rates, has remained at 4.33% since the December rate cut, down by 100 basis points from the pre-cut levels (blue). I’m not sure we’ve ever seen anything like this before – a 114-basis-point surge of the 10-year yield while the Fed cut by 100 basis points – but there’s a good reason for it.
The reason for this phenomenon of the Fed cutting by 100 basis points while longer-term yields soar by over 100 basis points is the unusual situation the economy went through, and why the Fed cut rates.
Normally the Fed cuts rates when it sees a recession on the horizon. And the bond market, also seeing a bad economy ahead, begins to send longer-term yields lower....
....MUCH MORE
