Yields on 10-year Treasury notes rose 0.85 percentage points during the three months last year when the Federal Reserve cut short-term interest rates by a full percentage point. In the seven+ months since the Fed stopped reducing short-term interest rates, yields on 10-year Treasury notes have dropped about a quarter percentage point.
Conventional thinking goes like this: When the Fed cuts its benchmark interest rate, the federal funds rate, all interest rates should fall. However that is a cartoonish view of how credit works. Investors in long-term debt like a 10-year Treasury note care not just about the short-term interest rate. They also care about the long-run inflation outlook and other risks like default. Long-term yields do not always move in line with Fed policy.
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