The U.S. 10-year Treasury yield has spiked since the Federal Reserve’s September 2024 rate cut, driven by a mix of economic resilience, rising productivity, fiscal pressures, and heightened market volatility.
The U.S. Yield Surge
Strong Economic Data: Surprisingly robust U.S. economic indicators have tempered market expectations for further Fed rate cuts. The Citi Economic Surprise Index has climbed since August, raising the projected Fed Funds rate for December 2025 by 80 basis points, signaling economic strength that discourages additional easing.
Productivity Growth Impact: Boosts in productivity since 2023 have lifted the neutral interest rate (r*), pushing real yields higher. This resembles the 1995 pattern, when productivity gains unexpectedly increased the 10-year yield after Fed rate cuts.
Fiscal Expansion: Unlike the fiscal tightening of the 1990s, today’s U.S. fiscal policies are expansionary, fueling additional long-term bond issuance and raising the term premium on 10-year bonds by 45 basis points since September. This increase in supply, combined with inflation concerns, has also pushed breakeven inflation up by 30 basis points.
Market Volatility: Uncertainties in interest rates and fiscal policy have intensified bond market fluctuations, pressuring the term premium. The MOVE index—a volatility measure for interest rates—reflects this with higher levels, responding to shifting economic and fiscal forecasts.
These factors suggest that the 10-year yield may remain elevated if productivity and fiscal expansion continue and market volatility stays high, with potential implications for capital flows and emerging markets.