Wall Street Expects Fed Rate Cuts, but Markets Push Back: Yields Soar, Sentiment Sours

Wall Street is convinced – the Federal Reserve is set to cut interest rates in just 15 days. Yet, there’s no celebration in the markets. Investors are steering clear of risk, and the bond market is behaving in a way completely opposite to what textbooks suggest. The 30-year U.S. Treasury yield is surging toward the 5% mark – a level not seen since the depths of the 2008 financial crisis.

Fed under pressure, but bonds refuse to follow Traders currently expect total rate cuts of 50 basis points in 2025. There’s even a 34% probability that the Fed will lower rates by 75 basis points this year. Still, optimism is nowhere to be found. Instead of relief, skepticism dominates – Treasury yields are climbing higher. In just five weeks, the U.S. Treasury has issued over $200 billion in new bonds, yet buyers are scarce. Investors demand stronger compensation for rising risks, confirmed by surging term premiums on 10-year bonds, now at their highest levels since 2014. At the same time, core inflation has risen above 3% again. If the current pace continues, the dollar could lose more than 25% of its value over the next decade. Since 2020, it has already depreciated by around 25%, squeezing consumers while government spending continues to grow unchecked.

Global bond markets flash red The U.S. is not alone in this struggle. The U.K. has already faced the consequences. The Bank of England cut rates five times in one year, hoping to support a weakening labor market. The result? Quite the opposite – yields on 30-year gilts surged above 5.70%, their highest since 1998. Investors rejected the central bank’s move and demanded higher returns for the increased risk. Japan is experiencing a similar trend. Yields on 30-year Japanese government bonds now stand above 3.20%, more than thirty times higher than in 2019. The global bond market is sending a clear message: central banks can no longer “buy” their way out of structural debt spirals.

Gold hits records as stocks bleed While bond markets struggle, one asset remains unfazed – gold. Its price has climbed to a record $3,600 per ounce, marking a 33% increase since the beginning of the year. That’s more than triple the gains of the S&P 500. Equities, however, are taking the hit. The Dow Jones fell 249 points on Tuesday, closing at 45,295. The S&P 500 dropped 0.69% to 6,415, while the Nasdaq slid 0.82% to 21,279. Big names also declined – Nvidia lost 2%, while Amazon and Apple both fell around 1%. September has historically been a brutal month for equities, and after a strong summer rally – with the S&P 500 gaining nearly 2% in August, breaking through 6,500 for the first time and posting five new all-time highs – traders are locking in profits and shifting toward safer assets.

Stagflation emerges as reality The Fed now faces a difficult dilemma. On one side, youth unemployment among those aged 16 to 24 has reached 10%, which could serve as justification for cutting rates. On the other side, inflation is accelerating, the labor market is weakening, and economic growth is slowing. This combination is the nightmare scenario for central banks: stagflation. And it is now becoming a reality not only in the United States, but across global markets.

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