Investors expect the Fed to cut rates on Wednesday and keep cutting in 2026, but bond yields are hinting at deeper uncertainty ahead for markets.
Markets think a rate cut on Wednesday is nearly a foregone conclusion, but bond yields are doing something strange.
Despite a cut being priced in for weeks, US government bonds have been selling off, driving yields higher. The 10-year Treasury yield has jumped by about 20 basis points from its low in November, hovering around 4.20%. on Wednesday.
It’s a reminder that long-term bond yields and the Fed’s short-term borrowing rate do not move in lockstep, but it’s still an unusual move given predictions for rates to keep coming down in 2026.
There are a few things that help explain the move.1. Inflation concerns
Front and center for bond investors is the inflation outlook, and it’s murky, to say the least.
While price growth has cooled in the US since peaking around 9% in the summer of 2022, inflation has crept back up in recent months.
If the Fed cuts interest rates too quickly, that could stoke fresh inflation. That concern has grown even more pressing to investors in recent weeks as President Donald Trump is expected to announce his pick for the next Fed Chair.
Kevin Hassett, a Trump ally who has long supported the president’s view that interest rates should be significantly lower, has emerged as the top candidate in recent weeks.
«The biggest thing happening in the background is the question of who will lead the Fed», Christian Hoffmann, the head of fixed income at Thornburg Investment Management, said, pointing to Hassett’s potential influence over the market’s monetary policy expectations even before the new Fed Chair is sworn in.
