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the federal reserve has finally cut interest rates. yet a key measure of borrowing costs has been rising over the past few trading days…

since the federal reserve announced a 50 basis point rate cut last wednesday, long-term u.s. treasury yields have been rising - the benchmark 10-year u.s. treasury yield closed at around 3.73% last friday, higher than 3.64% the day before the fed cut interest rates.

the rise in the 10-year treasury yield, known as the "anchor of global asset pricing," is a reminder that the federal reserve cannot completely control domestic borrowing costs at will. although the fed manages short-term interest rates on overnight borrowing between banks, these overnight borrowing costs are passed on to credit card debt and other types of floating-rate loans. but interest rates on more forms of debt are mainly affected by fluctuations in u.s. treasury yields.

the changes in this part willdepends on investors' expectations of the future path of the fed's short-term interest rates, not where they are now...

the 10-year treasury yield is indeed about 100 basis points lower than earlier this year, when the prospect of a fed rate cut seemed more uncertain.looking ahead, there is no guarantee that treasury yields will continue to fall further once the u.s. economy stabilizes, which could frustrate potential homebuyers and other u.s. borrowers who hoped for a bigger drop in rates.

john madziyire, head of the vanguard group's treasury department, said his team is currently betting that u.s. treasury yields may rise further and believes that the current market forecast for the extent of the rate cut still exceeds the forecasts of most federal reserve officials themselves.

“if the fed fails to cut rates as aggressively as the market expects, the 10-year treasury yield could actually move higher.” he pointed out.

why did long-term bond yields rise instead of falling after the interest rate cut?

logically speaking, the performance of yields is still related to the difference between market expectations and the fed's stance. according to cme's fed watch tool, traders in the interest rate futures market believe that the fed's benchmark interest rate will drop from nearly 5% now to just below 3% by the end of next year. the dot plot of fed officials only predicts that the benchmark interest rate will be between 3.25% and 3.5% by the end of next year.

in terms of long-term interest rate forecasts, the fed's median estimate even raised from 2.8% in the june dot plot to 2.9%.

arguably, the climb in yields following last week’s fed rate cut was particularly noteworthy as markets had been debating whether the fed should initiate its rate-cutting campaign by lowering the benchmark federal funds rate by a traditional 25 basis points or a more aggressive 50 basis points.advocates for a deeper rate cut are generally more concerned about the economic outlook and believe the fed should take bolder steps to prevent further weakening in the labor market.

in fact, some investors believe that the fed's 50 basis point start to this round of rate cuts may even help push up long-term bond yields in the long run - because the fed chose a larger rate cut from the beginning, which shows that it is willing to fight to keep the economy away from a recession, which would almost certainly lead to a larger drop in long-term bond yields.

in addition to expectations of interest rate trends, the performance of the 10-year treasury yield also depends to some extent on the term premium.-- that is, how much additional compensation investors demand for holding longer-term treasury bonds rather than shorter-term treasury bonds.

although term premiums have been trending downward in recent decades, many investors believe that once short-term rates stabilize, the 10-year treasury yield should be about 100 basis points higher than short-term rates. this is partly because investors expect the u.s. government to issue a large amount of treasury bonds in the coming years to finance the increase in the federal budget deficit. some also cite the risk of rising inflation again.

“inflation has receded but it’s still above the fed’s 2% target, so i think investors who hold the long end of bonds will want to be compensated for that,” said jeff given, senior portfolio manager at manulife investment management.

of course, some investors who are pessimistic about the economy are still betting that long-term bond yields may fall further.

jamie patton, co-head of global rates at tcw, said her team believes the 10-year treasury yield could fall below 3% in the next six months as the impact of the federal reserve's previous rate hikes linger, potentially leading to a recession.

“the fed’s rate cut this month won’t affect the economy right now — it will help the economy in the future, but the economy will still feel the lagged effects of the tightening policy over the next four to six months,” she said.