Following the Federal Reserve’s two-rate cut and release of its latest Summary of Economic Projections (SEP) on September 18, the U.S. 10-year Treasury yield has surged by 60 basis points over the past two months, from around 3.7% to approximately 4.3%. Why have Treasury yields risen so sharply? We attribute this trend to several key factors:

Market Overestimation of Rate Cuts
Earlier, the market was more optimistic about rate cuts, generally expecting that a potential recession in the U.S. would prompt the Fed to lower rates by over 11 cuts in this cycle. As a result, the 10-year Treasury yield declined to around 3.65% between July and September. However, the SEP released on September 18 indicated that rate cuts may only total approximately 10 basis points in this cycle, with the Fed expressing confidence in managing inflation and stabilizing the labor market. This shift led the market to recalibrate expectations, pushing the 10-year Treasury yield up by 20 basis points to around 3.85%—a key initial factor behind the rise in yields.

(Source:  Fed)

Stronger-than-Expected Economic Data
At the Fed’s meetings in July and September, the emphasis shifted from inflation to the labor market, with the market trading Treasuries based on the notion that “a deteriorating labor market could trigger a recession in the U.S.”

However, unexpectedly, the employment data released on October 4 significantly exceeded market expectations. Non-farm payrolls for September saw a substantial increase, and the unemployment rate declined once again. Although October’s non-farm payroll data showed a sharp drop, this was primarily due to temporary impacts from hurricanes and strikes. The ADP data indicates that the job market remains robust, which has led the market to raise its interest rate expectations again. As of November 1, the U.S. 10-year Treasury yield has risen to approximately 4.38%.

(Source:  CME, FedWatch, TrendForce)

Additionally, recent data on retail sales and GDP have highlighted robust consumer spending, with consumer confidence also climbing steadily. These indicators underscore the resilience of the U.S. economy, contributing to the recent rise in Treasury yields.

Potential Debt Expansion in Coming Years
While the U.S. Treasury on October 30 announced no changes to its long-term bond issuance size and the Treasury Secretary signaled that issuance would remain steady for upcoming quarters, potential increases in U.S. debt may be inevitable. The lack of a strong focus on deficit reduction among presidential candidates in the ongoing election cycle suggests debt growth may persist, which is another significant factor driving up recent Treasury yields.
Overall, if economic data continue to show strength, the Fed’s ability to cut rates may remain constrained. Meanwhile, though the Treasury plans to maintain issuance levels in the short term, the absence of a deficit reduction focus among candidates signals ongoing risks of fiscal expansion. These factors are likely to exert further upward pressure on U.S. Treasury yields.

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