Fed Cuts Interest Rates, But Mortgage Costs Soar: Unpacking the Disconnect in the Bond Market

The Fed Cuts Interest Rate, but Mortgage Costs Climb Amid Rising Long-Term Yields

The Fed cuts its rate in a bold step. Consumers still see steep mortgage costs. Short-term loans drop in cost. Long-term U.S. Treasury yields move higher. Mortgage rates follow these yields. The market does not work as many expected.

Fed’s Rate Cut and Market Reaction

On Wednesday, the Fed drops its lending rate by one quarter-point. The target now sits at 4.00%–4.25%. This is the first cut in 2025. Fed Chair Jerome Powell explains the move as a risk management step. Stock buyers cheer the cut and push equities to high marks. Bond traders watch long-term yields rise after a small drop. They doubt the shift in Fed policy.

Treasury Yields on the Rise

The 10-year Treasury yield hits 4.145%. It fell below 4% for a short time before climbing again.
The 30-year Treasury yield, linked to mortgages, moves to about 4.76%. It had been near a low of 4.604%.

Peter Boockvar, Chief Investment Officer at One Point BFG Wealth Partners, says bond traders do not favor rate cuts when inflation stays high. They sell long-term bonds. This drop in price makes yields go up. It shows the simple bond rule: low price ends up with high yield.

Inflation Concerns and Economic Outlook

The Fed’s new outlook shows faster inflation in 2026. This news makes some worry that softer policy may miss the chance to check price rises. Even though the Fed has cut rates several times since early 2024, the 10-year yield stays near its old level. Weak job data led some to hope for a focus on new jobs. But bond buyers see high long-term yields as a sign to stay cautious. Inflation still runs above the Fed’s 2% aim.

Impact on Mortgages and the Housing Market

Higher Treasury yields push mortgage rates up. Right after the Fed spoke, mortgage rates climbed. This rise wipes out gains seen when rates hit a three-year low. Homebuilder Lennar notes the tough scene. The Miami firm missed its revenue mark for Q3. It warned that high interest costs slowed deliveries.

The Bigger Picture for Investors

Chris Rupkey, Chief Economist at FWDBONDS, points to a long-term view in the bond market. Investors watch for hints on future rate moves and more cuts. Boockvar reminds us that U.S. Treasury yields feel the global mood. Other nations see higher rates, which adds to the bond market mix.

A Caution on Yield Movements

Lower long-term yields can point to fear of a recession. In this case, higher long-term yields may hint at stronger jobs and lower unemployment claims. Rupkey notes that a drop in yields is not always a sign of good news. Often, it comes with economic slowdowns and job losses.
"The bond market tends to focus on very bad news — not just bad news… but really grim news," Rupkey comments. He shows that the market sends mixed signals when it comes to the economy.

In summary, the Fed cut rates to support the market amid weak job hints. Yet, long-term bond yields push mortgage costs higher. This twist adds caution for both buyers and lenders. The housing sector may feel the change as banks adjust to the new market mood.

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