Key Questions: Why Have Bond Yields Remained High Even as the Fed Has Cut Rates?

“Time, which sees all things, has found you out.” — Sophocles, Oedipus Rex

For many years investors defied Sophocles’ warning, rewarding leverage and punishing caution as central banks drove interest rates toward zero. Today, that inversion is finally unwinding. After nearly two decades of extraordinary monetary intervention, investors have begun to reclaim their right to real returns, demanding higher yields to compensate for inflation risk, fiscal excess, and eroding monetary credibility.

Markets Forgive Slowly and Never Forget

Despite repeated forecasts that cooling inflation and easing by the Federal Reserve (the Fed) would trigger a swift return to the low-rate era, bond yields have remained stubbornly high. Instead of falling in tandem with policy rates, yields on U.S. Treasuries, German Bunds, and Japanese Government Bonds have held their ground or climbed.

This persistence reflects a critical shift in market psychology. As we move through 2026, central banks sit at an uncomfortable inflection point. Since 2024, the Fed has engaged in an easing cycle synchronized with other central banks despite core inflation remaining above the 2% target. Over the past two years, the Fed and its peers have begun easing policy (i.e., lowering interest rates) despite inflation remaining above the Fed’s target. This reflects the difficult trade-off between supporting growth and employment while maintaining price stability. This landscape is historically anomalous. Historically, central banks only embark on a sustained cutting cycle once inflation has been decisively contained. By easing prematurely, central banks risk signaling that they are no longer willing to pay the economic price required to fully tame inflation.

Fiscal Dominance and the Missing Buyer

Compounding this challenge is the emergence of fiscal dominance, where government spending dictates macroeconomic outcomes more than monetary policy can control. More specifically, the United States and other major economies continue to run large and growing budget deficits, leaving central banks reluctant to tighten monetary policy for fear of destabilizing public finances or triggering surges in borrowing costs.

Elevated long-term yields also reflect rising term-premia, where investors are demanding extra compensation for holding longer maturity Treasuries. In the U.S., financing needs related to tax cuts, defense spending, and entitlement programs are expanding. At the same time, quantitative tightening has removed central banks as price-insensitive buyers of government debt, forcing private markets to absorb massive new issuance. This shift alone places upward pressure on long-term yields.

Fiscal Repression Redux: Lessons from Japan

The current U.S. policy discourse echoes the fiscal repression experiment pioneered by the Bank of Japan (BOJ). After its asset bubble burst in 1991, the BOJ kept rates at or below zero for two decades to stimulate investment and suppress borrowing costs. The experiment largely failed as growth remained stagnant. The BOJ finally reversed course in 2024 and initiated a gradual policy normalization, lifting policy rates from −0.10% to the current 0.75%.

This raises an important question: is the United States drifting toward a similar framework?

Recent calls from the U.S. administration to lower mortgage rates and public emphasis on suppressing Treasury yields echo Japan’s past approach. While politically appealing, Japan’s experience suggests that artificially suppressing yields can distort capital allocation, entrench inefficiencies, and ultimately fail to generate sustainable growth. 

The era of hyper-globalization, which suppressed inflation for decades, is receding (a theme we enunciated in our 2026 Outlook). Supply chains are being rebuilt for resilience rather than efficiency, a structurally inflationary shift. Furthermore, aging demographics and AI-driven energy demands are increasing the global competition for capital. 

Attempts to suppress interest rates through policy intervention risk producing unintended consequences, including reduced productivity, distorted credit allocation away from smaller enterprises, and heightened inflationary pressures.

Conclusion: The New Neutral

Loose fiscal and monetary policy are unsettling investors. History suggests this mix can fuel growth but also entrench inflation, eventually forcing central banks to reverse course. While this mix can fuel short-term growth, history suggests it eventually forces painful repricing.

Markets that are pricing in a return to the lower-for-longer era may be caught off guard. With heavy government borrowing and a higher “neutral” interest rate shaped by nationalistic, demographic, and technological forces, the long-term rate environment is settling well above the levels of the past decade. For investors, the challenge is to look beyond the immediate noise of Fed cuts and prepare for a world where capital finally carries a real cost again.

For more information, please contact your advisor.