After the Federal Reserve cut interest rates last year, U.S. Treasury yields unexpectedly soared. Will history repeat itself now?
According to news from the Chasing Wind Trading Desk, as the Federal Reserve enters a rate-cutting cycle again, the market still remembers last year's &#34;black swan&#34; in the bond market, but a report released by Barclays on October 14 provides a starkly different forecast.
The bank believes that the unique conditions that led to the bond market sell-off in 2024 no longer exist, and investors should prepare for a gradual decline in yields.
<h2>Reviewing 2024: The &#34;Abnormal&#34; Sell-off During the Rate-Cutting Cycle</h2>
The Barclays report first reviews the &#34;abnormal&#34; phenomenon of 2024. In historical rate-cutting cycles, U.S. Treasury yields typically continue the downward trend established before the rate cuts.
However, after the Federal Reserve initiated rate cuts in September 2024, the 10-year U.S. Treasury yield soared by about 100 basis points in just three months, which sharply contrasts with the historical pattern where yields usually decline by 25-50 basis points during rate-cutting cycles.
<img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/d7fa77de-0e0c-43be-a4d4-091eca0a66fa.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/d7fa77de-0e0c-43be-a4d4-091eca0a66fa.png"/>
The report analyzes that this sell-off was primarily triggered by two unexpected factors:
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Significant Reversal in Economic Data: In the third quarter of 2024, economic data was generally disappointing, with unemployment rates soaring and triggering the &#34;Sahm Rule&#34; recession signal. The market once expected the Federal Reserve to implement deep rate cuts, with pricing indicating that the policy rate would drop to 3% within a year. However, in the following months, economic data rebounded strongly, and the unemployment rate stabilized and fell, leading the market to quickly correct its pessimistic expectations of an economic recession, thereby pushing up interest rates. <img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/92c3d0a3-a8ba-41bd-bd19-4b5a45c8005e.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/92c3d0a3-a8ba-41bd-bd19-4b5a45c8005e.png"/>
</li>
<li>
Clouds of Fiscal Expansion: As the 2024 U.S. elections approached, the market began to price in a scenario of a &#34;Republican landslide victory.&#34; According to estimates from the Committee for a Responsible Federal Budget (CRFB) at the time, Trump's campaign agenda could increase the deficit by nearly $8 trillion over ten years. Concerns about a future massive supply of government bonds drove the term premium from a low of nearly 10 basis points to about 80 basis points. <img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/b898701e-e945-4ff3-b294-c0d819bb8bcc.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/b898701e-e945-4ff3-b294-c0d819bb8bcc.png"/>
</li>
</ol>
<h2>A Different Era: The Threshold for Economic Upside Surprises Has Been Significantly Raised</h2>
Barclays points out that the biggest difference between now and 2024 is the market's expectations for the economy. Currently, investors are quite optimistic.
Data from the report shows that the market consensus expects U.S. GDP to grow by about 2% in 2026, with approximately 90,000 new jobs added each month. Barclays believes these expectations are already above the potential growth level of the U.S. economy, which is estimated at a potential GDP growth rate of about 1.5%, with a job breakeven point of 0-50,000 jobs per month
<img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/840aa2c7-d52f-4b07-a730-4e7fda88f666.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/840aa2c7-d52f-4b07-a730-4e7fda88f666.png"/>
In this context of &#34;high expectations,&#34; it becomes extremely difficult for economic data to bring significant &#34;surprises&#34; again. The report further analyzes:
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Slowing AI investment growth: Although capital expenditure (Capex) levels in the AI sector continue to rise, its growth rate is expected to slow, and its contribution to GDP growth will diminish.
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<li>
Diminishing fiscal stimulus: Considering factors such as tariffs, overall fiscal policy is unlikely to form a net stimulus. According to Barclays, the budget deficit as a percentage of GDP is expected to shrink from about 6.2% in 2025 to 5.7% in 2028. The market consensus expects the deficit as a percentage of GDP to be 6.5% in 2026 and 2027, higher than Barclays' own predicted shrinking trend.
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Limited wealth effect: The savings rate has fallen below pre-pandemic levels, and households need to see net asset growth consistently exceed expectations to support consumption beyond income growth, which is not an easy task.
</li>
</ul>
<h2>A different era: Expectations for fiscal expansion have been digested, and the impact of duration supply shocks has weakened</h2>
In terms of fiscal policy, Barclays believes the likelihood of another large-scale surprise is also very low.
First, the market has already anticipated that deficits will remain at high levels in the coming years (the consensus expects the deficit as a percentage of GDP to be 6.5% in 2026 and 2027). Second, with the midterm elections still far off, there is a high degree of uncertainty in the political landscape, making it difficult to form clear expectations for fiscal expansion in the short term.
More critically, the report emphasizes that U.S. Treasury Secretary Janet Yellen's statements have weakened the direct link between fiscal deficits and long-term bond supply. Yellen has publicly questioned the necessity of increasing long-term bond issuance at current interest rate levels, suggesting that the Treasury may prefer to rely on short-term Treasury bills (T-bills) to meet financing needs. This means that even if the deficit exceeds expectations, it may not necessarily translate into a supply shock for the long-duration U.S. Treasury market.
<h2>Different market starting points: Higher risk compensation and solid overseas demand</h2>
Barclays also pointed out several key differences in initial market conditions:
<ul>
<li>
Term premium is at a high level: Currently, based on the Kim Wright model, the 10-year U.S. Treasury term premium is about 50 basis points, while this figure was close to zero in September 2024. This provides a thicker safety cushion for investors holding long bonds and also means that there is limited room for further significant increases.
</li>
<li>
More moderate rate cut expectations: The market has generally accepted a &#34;shallow&#34; rate cut cycle, with the priced-in rate cuts being far smaller than the pessimistic expectations of the same period last year.
</li>
<li>
Strong overseas demand remains: Despite rising global yields, overseas investors' demand for U.S. Treasury bonds remains robust. Data from the U.S. Treasury shows that in the three months ending July 2025, foreign investors purchased an average of $110 billion of U.S. long-term fixed income products per month, higher than the average levels of the previous 6 and 12 months
</li>
<li>
Japanese investors will not sell off on a large scale: The report specifically analyzes Japanese investors. Due to the shift in their overseas bond holdings structure towards more passive trust accounts, and the attractiveness of hedged U.S. Treasury yields expected to improve by mid-2026, large-scale capital inflows back to Japan and sell-offs of U.S. Treasuries are unlikely.
</li>
</ul>
<h2>Barclays' Bottom Line: Yields will gradually decline, not soar</h2>
Considering all the above factors, Barclays concludes: The most likely scenario is that interest rates will gradually decrease, rather than a repeat of the surge in 2024.
The bank's model calculations indicate that, taking into account the policy interest rate path, a reasonable term premium (about 20 basis points), and swap spreads, the fair value of the 10-year U.S. Treasury should be 3.8% by the end of 2025, lower than the 4% level at the time of the report's release.
Therefore, Barclays maintains its &#34;long U.S. Treasury duration&#34; recommendation. Of course, the report also highlights a risk: if the credibility of the Federal Reserve is damaged—such as through excessive rate cuts in the face of persistent inflation—long-term yields may still face upward pressure. But for now, this is not its baseline scenario.
<img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/e7649f1a-f1fd-4545-a136-37d3b1a81dca.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/e7649f1a-f1fd-4545-a136-37d3b1a81dca.png"/>
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Barclays believes that the abnormal rise in U.S. Treasury yields last year was mainly driven by two factors: better-than-expected economic data and a shift towards expansionary fiscal policy expectations after the U.S. elections, both of which are currently not present. The market's expectations for economic growth and employment are already optimistic, and the threshold for fiscal expansion is very high, limiting the possibility of economic and fiscal upside surprises. It is expected that U.S. Treasury yields will gradually decline in the future, with the 10-year Treasury yield likely to fall below 4%

- Following the Federal Reserve's interest rate cuts, U.S. Treasury yields unexpectedly surged in 2024, contrasting historical trends.  
- Barclays predicts that the unique conditions leading to the 2024 sell-off are no longer present, suggesting a gradual decline in yields instead.  
- The report highlights that current market expectations are optimistic, with GDP growth anticipated at around 2% by 2026, making significant economic surprises less likely.

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Barclays

Do you remember last year when "the Federal Reserve cut interest rates, but U.S. Treasury yields rose instead"? Barclays believes: this time it won't happen!