Bond Market Decouples from Fed Cuts; Yields Stay High

The Federal Reserve’s easing since late 2024 has not pushed down the 10-year Treasury yield, leaving long-term borrowing costs elevated while short-term policy rates fell. Investors are setting long yields based on inflation expectations, the flow of new Treasury supply and the government’s fiscal path.

The Fed controls the federal funds rate, the overnight lending cost between banks. The 10-year Treasury yield, which more closely determines mortgage and corporate borrowing rates, is driven by decade-long inflation expectations, the volume of new Treasury debt and investor confidence in U.S. public finances.

Policy easing reduced the fed funds rate by roughly 100 basis points across three cuts at the end of 2024, with another cut by September 2025. Over the same roughly 12-month span, the 10-year yield was nearly unchanged. Analysts characterized the outcome as a reversal of the mid-2000s pattern in which short-term moves failed to lift long yields.

Treasury supply in fiscal 2025 was large. Federal debt stood at $37.6 trillion in September 2025. The Treasury issued $30.2 trillion of marketable securities in fiscal 2025 to refinance maturing debt and fund new borrowing. The government faced $9.1 trillion of maturing securities in fiscal 2025 alone. Annual interest costs reached about $1.2 trillion in FY2025. The Congressional Budget Office projects deficits above $2 trillion per year over the coming decade. Market participants have priced those figures into long-term yields.

The disconnect is visible in the housing market. Mortgage rates follow the 10-year Treasury more closely than the fed funds rate. The 30-year fixed mortgage rate briefly fell to about 6.08% before the September 2024 cut, but then spent much of the following year between roughly 6.8% and 7.1%. The spread between the 30-year mortgage and the 10-year Treasury, which historically runs about 1.5 to 2 percentage points, widened to roughly three points in 2023 and 2024.

Higher long-term yields increase the cost of servicing federal debt. As yields rise across the curve, refinancing maturing securities becomes more expensive. The CBO projects net interest as a share of federal outlays to rise from about 13.6% in FY2025 to over 14% by FY2027.

The Federal Reserve has also changed its balance sheet approach. After shrinking securities holdings by more than $2.2 trillion since mid-2022, the Federal Open Market Committee announced in October 2025 it would halt runoff starting in December and began buying Treasury bills through Reserve Management Purchases to support money-market functioning. Officials characterize those operations as technical liquidity measures.

Market pricing has shifted. At times traders priced a potential Fed rate hike by year-end 2026, and some forecasts have pushed expected easing into 2027. The changes have left long-term borrowing costs more responsive to Treasury supply and fiscal outlook than to the Fed’s policy rate.