Deutsche Bank has examined how rate cuts affect long-term borrowing costs differently from the overnight rates set by the Federal Reserve. Their analysis of historical data shows a weak connection between these rates. A recent chart reflects this, indicating that even after a year of the Fed cutting rates, current yields are similar to pre-cycle levels.

Performance of Rate Cutting Cycles

Since 1966, there have been 13 rate-cutting cycles. In these, the 10-year yield decreased 6 times and increased 7 times. Currently, yields are higher than at the start of the cycle, with 8 out of the 14 cycles showing increased yields. Interestingly, the lowest 10-year UST yield since May 2023 occurred just before this cycle began. Historical trends suggest that selling bonds might be more beneficial at the start of a rate-cutting phase. Each cycle is affected by different events, like Covid or the Vietnam War. Deutsche Bank notes similarities between now and the 1966 environment, which had low unemployment, larger budget deficits, and relaxed monetary policies. This makes the 1966 period particularly noteworthy, as it resembles today’s situation. Given these insights, Deutsche Bank has recently recommended selling 10-year notes. Since September 2024, the Federal Reserve has cut the fed funds rate three times, totaling 75 basis points. Yet, the 10-year Treasury yield remains around 4.3%, nearly the same as it was a year ago. This suggests that the market doubts the sustainability of lower short-term rates. Reviewing the past 14 rate-cutting cycles, we find that a year in, the 10-year yield was higher in 8 of these cycles, including the current one. This historical pattern implies that, barring a significant economic crisis, long-term yields are likely to stay the same or even rise slightly. The market is considering factors beyond just the Fed’s overnight rate.

Strategies for Traders

For derivative traders, shorting 10-year Treasury note futures (ZN) may be a smart strategy in the coming weeks. Recently, August 2025 core PCE inflation data came in unexpectedly high at 3.1%. This leads to the expectation that bond prices will drop as yields rise to match ongoing inflation. A more cautious approach would be to buy put options on these futures to limit potential losses. Another strategy involves interest rate swaps, where traders pay a fixed rate to receive a floating one. This approach benefits if short-term rates, which affect the floating leg, remain higher longer than what the market predicts. This situation mirrors the 1966 policy error, where the Fed relaxed policy in a low unemployment environment with high government spending, leading to inflation and rising long-term rates. The disconnect between Fed policy and long-term yields is causing uncertainty, indicating increased bond market volatility. The MOVE Index, which measures Treasury volatility, has risen from a low of 95 in July 2025 to over 115 this week. Traders might consider using options strategies, like long straddles on Treasury futures, to profit from significant price movements in either direction, betting on a decisive break rather than a specific outcome. Create your live VT Markets account and start trading now.

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