Why are Long Term U.S. Treasuries Trending Down When the Fed is Lowering Interest Rates?
Despite the Federal Reserve (Fed) lowering interest rates, the ICE US Treasury 20+ Year Index has declined -7.2% from its recent peak a few weeks ago.
The downward trend in long-term Treasury bond indices, even when the Federal Reserve is lowering rates, can seem counterintuitive, but several factors could explain this:
1. Inflation Expectations
If inflation expectations rise, even as the Fed lowers rates, the real return on long-term Treasuries becomes less attractive. Investors may require a higher yield to compensate for the reduced purchasing power due to inflation. This leads to a decline in bond prices, as yields move inversely to prices.
2. Supply and Demand Dynamics
The U.S. Treasury might be issuing more long-term debt to finance government spending. An increase in supply can push prices down as investors demand higher yields to absorb the additional bonds.
3. Risk Sentiment
If investors anticipate that the Fed's rate cuts won't be sufficient to support economic growth, they might move away from long-term Treasuries in favor of riskier assets, like equities, or other higher-yielding bonds. This can lead to selling pressure on long-term bonds, causing their prices to drop.
4. Yield Curve Inversion
The Fed's rate cuts generally affect short-term rates more directly than long-term rates. If the market perceives that rate cuts signal a weakening economy, long-term bonds could see lower demand. In some cases, the yield curve might flatten or invert (where short-term rates exceed long-term rates), which can create downward pressure on long-term bond indices.
5. International Factors
Global economic and geopolitical developments can affect U.S. Treasury prices. For example, if foreign central banks or sovereign wealth funds sell off U.S. Treasuries, this could drive long-term yields higher, even in a rate-cutting environment.
While Fed rate cuts typically lower short-term rates, long-term Treasury prices are influenced by a broader set of factors, including inflation expectations, bond supply, risk sentiment, and global market dynamics.
However, long-term US Treasury bonds remain in an uptrend as measured by the longer-term (200-day) moving average, so this may be a short-term pullback within an ongoing uptrend.
