The Fed cut its interest rate, but mortgage costs went higher

Longer-term Treasury yields jumped this week, flying in the face of the Federal Reserve’s interest rate cut, as bond investors didn’t get the assurances they sought.

The 10-year Treasury yield jumped as high as 4.145% after briefly falling below 4% this week. The 30-year Treasury yield — closely followed for its connection to home mortgages — traded around 4.76%, up from a low of 4.604% earlier in the week.

The Fed lowered its benchmark lending rate a quarter percentage point to 4.00%-4.25% at the end of its meeting on Wednesday, prompting investors to send stocks to record highs as they cheered the first rate cut of the year. But bond traders saw the move as an opportunity to “sell the news” after recent bond gains, according to Peter Boockvar, chief investment officer at One Point BFG Wealth Partners.

Traders of longer-dated bonds “don’t want the Fed to be cutting interest rates,” Boockvar said.

Their selling of long-term bonds drove down the price and drove up the yield. Prices and yields for bonds move in an inverse direction.

Easing monetary policy at a time when inflation is running above the Fed’s 2% target and the economy looks steady can indicate the central bank is “taking the eye off” inflation, Boockvar said, a key risk to longer duration securities. Updated economic projections from the Fed released Wednesday showed policymakers seeing slightly faster inflation next year.

Investors have been looking for the Fed to shift its emphasis from fighting inflation to boosting the labor market following weak employment data earlier this month. Fed Chair Jerome Powell called Wednesday’s rate cut a “risk management” move, pointing to the softening labor market.

“The bond market, if [longer yields] continue higher, would be sending a message that, ‘We don’t think you should be aggressively cutting interest rates with inflation stuck at 3%,'” Boockvar said.

Additionally, Boockvar said higher yields this week came after longer-dated bond prices had steadily risen in recent months, sending yields lower. It was a similar move as was seen following the Fed’s rate cut in September of last year, he noted.

But Boockvar said it’s noteworthy that the 10-year note yield is little changed compared with early 2024, despite the Fed cutting rates multiple times since then.

A rise in longer-term yields can have implications for mortgage loans on big-ticket purchases like homes and autos as well as credit card costs. Mortgage rates rose following the Fed rate cut this week after reaching a three-year low ahead of the central bank action.

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