Since the Federal Reserve began its “pivot” in September 2024 with a series of rate cuts totaling 100 basis points, the bond market has moved in the opposite direction. The yield on the 10-year Treasury note has surged by 85 basis points, even as bond prices—measured by the bond ETF $TLT—have fallen nearly 11% in just three months. This is highly unusual, as bond prices typically rise when rates fall, leading to lower yields.

This divergence signals a troubling disconnect. Mortgage rates have climbed from 6% to 7% over the same period, amplifying borrowing costs at a time when monetary policy is supposed to ease financial conditions. The bond market seems to be “fighting the Fed,” reflecting skepticism about the sustainability of rate cuts amid persistent inflation.

Fed Chair Jerome Powell has downplayed the issue, but the growing gap between bond market behavior and policy goals could undermine economic recovery efforts and increase financial instability heading into 2025.

Stubborn Inflation Raises Concerns for 2025

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Despite the Fed’s aggressive rate cuts, November inflation data highlighted ongoing challenges. Core CPI, excluding food and energy, rose 0.3% for the fourth straight month, with shelter and food prices remaining key contributors. The slowdown in rents—up just 0.2%, the smallest increase since 2021—offered some relief, but broader inflation pressures persist, complicating the Fed’s strategy.

While lower rent growth may hint at easing price pressures in 2025, looming tariffs and geopolitical uncertainties could reignite inflationary risks. Bond investors remain cautious, pricing in potential headwinds as they await clearer signs of sustained disinflation. The Fed faces a delicate balancing act as it navigates a challenging economic landscape. 

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