Why Long-Term Bond Yields Stay High Despite Fed Rate Cuts

p>Following the Fed’s December 2025 rate cut (to 3.5023×3.75%), market behavior in bond yields has diverged sharply from historical norms. Normally, rate cuts lead to lower yields across the Treasury curve, especially long-term. But 10-year Treasury yields have instead remained elevated—hovering around 4.104.20%—and in recent months have even risen amidst easing expectations. [6][1][7]

Several interlocking factors explain this yield curve anomaly. First, inflation remains above the Fed’s 2% target, and slowing inflation has been insufficiently steep to convince markets of a downtrend—core CPI still tracks in the 3%+ range. [6][7] Second, economic data (e.g., strong GDP growth, resilient labor market) has outperformed expectations, reducing confidence that rate cuts will be aggressive or numerous in 2026. [3][4][2] These factors both elevate expectations of higher rates in the future, which in turn pushes up long-term yields.

Third, markets are demanding higher term premiums. That reflects uncertainty about future monetary policy, fiscal balance (including deficit financing and government borrowing), and who will lead the Fed once Jerome Powell’s term ends in May 2026. [3][4] Fiscal policy under the current administration raises the specter of further deficit spending, which increases bond issuance and upward pressure on long rates. [4]

Fourth, the real yield—i.e., yields adjusted for inflation—has increased significantly. With 10-year inflation-indexed Treasury rates approaching ~1.90% and inflation expectations elevated, investors are demanding compensation for inflation risk and erosion of returns. [6][7]

Together, these pressures mean bond markets are behaving as though there is a risk of inflation running hotter and growth remaining stronger than the Fed wants. This reduces the monetary easing room—and increases borrowing costs for the government, businesses, and households—even as short-term rates fall. For investment banks and strategic planners, this suggests duration risk is high; yield curve positioning and inflation protection become more critical.

Strategic implications include: re-evaluating long-duration bond exposure; preparing for higher borrowing costs; considering inflation-linked assets; and closely monitoring Fed communication around inflation and fiscal policies. Open questions include: how quickly will inflation fall; will growth weaken enough to enable more cuts; and how will fiscal policy (e.g., debt issuance) evolve in an environment of elevated rates?