When the Federal Reserve cuts interest rates, many people assume that bond prices rise in response. In reality, it’s more nuanced.
Short-term Treasuries are more closely correlated with the federal funds rate and often do rise. Long-term Treasuries measured by the performance of the iShares 20+ Year Treasury Bond ETF (TLT +0.29%) may or may not.
That’s because they’re more heavily influenced by economic conditions, not policy rates. Long-term yields reflect inflation expectations, risk premiums, government debt levels, and the direction of the U.S. economy. In other words, many moving parts are involved in pricing long bonds.
With markets anticipating rate hikes later this year, it can be helpful to look at what the Fed has done over the past few years and how the bond market has responded. Understanding this could help investors stay on the right side of whatever happens next.
Image source: Getty Images.
2023-2026: A look at the Fed, event by event
To lay some groundwork, let’s look at some of the more significant events during the latest Fed rate-cutting cycle and how the iShares 20+ Year Treasury Bond ETF responded.
| Date | Fed Action | Fed Funds Rate | TLT Response |
|---|---|---|---|
| Dec. 13, 2023 | Dot plot signals 2024 cuts but no change yet | Held at 5.25%–5.50% | +4% in the next two trading days |
| Sept. 18, 2024 | First cut of the cycle of 50 bps | Drops to 4.75%–5.00% | -2% in the next two trading days |
| Mid-November 2024 | Two months after the September rate cut | Held at 4.75%–5.00% | -11% from the September meeting |
| March 19, 2025 | No cut; projections still calling for two cuts | Unchanged | +0.5% in the next two trading days |
| September-December 2025 | Three consecutive 25 bp cuts | 4.25%–4.50% → 3.50%–3.75% | +6% September-October; -5% October-December |
| July 2026 | Fed holds rates for fifth straight meeting | 3.50%–3.75% | -5% year to date; 30Y yield above 5.25% for the first time since 2007 |
Data sources: Federal Reserve, iShares, Yahoo Finance. Table by author.
A few of these moments are worth unpacking individually. They’ve demonstrated the different ways that the Fed and Treasury bonds have reacted:
- December 2023: The Fed hadn’t cut yet but signaled cuts were coming soon. With the economy still in good shape, the markets viewed rate cuts as a reason to rally. Cuts were considered a normalization of rates following 2022’s aggressive hiking cycle, not a sign of an impending recession.
- September 2024 to November 2024: The Fed delivered a larger-than-expected half-point cut. But inflation was moving higher in the background, which usually results in higher long-term yields. That’s exactly how the bond market responded.
- March 2025: The Fed essentially maintained the status quo. Rates and economic expectations were largely unchanged, and long-dated Treasuries moved little.
- Late 2025 into 2026: A similar environment to the second half of 2024. The Fed continued cutting rates, but stubborn inflation remained a risk. Long yield continues to reflect that.
If you’re invested in short-duration Treasuries, you can probably count on higher rates to provide you with more income and low downside risk once they get priced in.
iShares Trust – iShares 20+ Year Treasury Bond ETF
Today’s Change
(0.29%) $0.24
Current Price
$82.76
Key Data Points
AUM
$41B
Dividend Yield
4.72%
Expense Ratio
0.15%
Long-term Treasury holders have been hit by higher inflation risk throughout the past three to four years, and that doesn’t seem to be changing now. As long as inflation remains high, it’s reasonable to expect this group to continue to struggle.
David Dierking has positions in iShares Trust – iShares 20+ Year Treasury Bond ETF. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.