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The Bond Market Will Not Be Fooled
Why the government and financial markets may be in for a rude awakening. By Allison Schrager
THERE’ S NO SUCH THING AS A SURE THING IN MARkets, but some things come pretty close. One of them is the proposition that there will be more interestrate cuts next year— and another is that these reductions will have little to no effect on long-term rates.
First, about the cuts. Federal Reserve Chair Jay Powell may have presided over his last announcement of a decrease, but odds are his successor will reduce rates further next year. It’ s not just that President Donald Trump wants lower interest rates, which boost the stock market and consumer borrowing and make servicing the national debt cheaper. It’ s that there are financial risks in the current environment, in which rates are high after a long period of being exceptionally low: Getting rates back down may help the U. S. avoid a credit crisis.
But the government and financial markets may be in for a rude awakening. Even if( when?) the Fed brings down shortterm rates, the 10-year U. S. Treasury bond yield will almost certainly not go down very much— at least not without significant financial repression.
It is as predictable as it is inexplicable: The Fed cuts rates and long-term yields go up. It could be that the market is skeptical that the likely next Fed chair, Kevin Hassett, will be serious about inflation. But even if Trump nominated the next incarnation of Paul Volcker, the Fed won’ t be able to lower the 10- year yield.
This may seem strange— in theory, the 10-year bond is supposed to reflect what people expect the future short-term yield to be. If the Fed is committed to easing in the future, rates should go down. And often the 10-year rate does follow the Fed policy rate.
JANUARY / FEBRUARY 2026 | FINANCIAL ADVISOR MAGAZINE | 33