As of Monday, October 21, Two-year Treasury yields have climbed 34 basis points since the Federal Reserve reduced interest rates on September 18 for the first time since 2020.
Rising yields “reflect the reduced probability of recession risks,” Steven Zeng, an interest rate strategist at Deutsche Bank told Bloomberg. “Data has come in pretty strong. The Fed may slow the pace of rate cuts.”
We’ve read this story before. In 1995 yields rose in similar pattern when the Greenspan Fed cooled the economy without causing a recession. In 1995, Greenspan and his colleagues at the Fed slashed interest rates just three times–from 6% to 5.25%–in six months. Yields on 10-year notes jumped more than 100 basis points 12 months later after the first cut that year, while two-year yields rose 90 basis points.
Interest swaps show traders are expecting the Fed to lower rates by 126 basis points through September 2025, compared with 195 basis points priced in about a month ago.
Yields on 10-year notes have surged to 4.2%, up from a 15-month low of 3.6% on September 17, the day before the Fed lowered interest rates by 50 basis points. That has reduced Treasuries’ total return this year to 1.7% through October 21, which trails the 4.3% gained by cash-equivalent T-bills.
Reductions in expectations for rate cuts from the Fed will exert downward pressure on stocks.
