Remember last year when "the Fed cut interest rates, but U.S. Treasury yields actually went up"? Barclays believes: This time it won't happen!

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After last year’s Fed rate cut, US Treasury yields rose sharply against expectations. Will history repeat itself this time?

According to Chasewind Trading Desk, as the Fed once again enters an easing cycle, the market still remembers last year’s “black swan” in the bond market, but a research report released by Barclays on October 14 gives a completely different forecast.

The bank believes that the unique conditions that triggered the 2024 bond market sell-off no longer exist, and investors should prepare for a gradual decline in yields.

Reviewing 2024: “Atypical” Bond Sell-Off During Rate Cut Cycle

The Barclays report first looks back at the “atypical” events of 2024. In past rate-cut cycles, US Treasury yields usually continued their pre-cut downward trend.

However, after the Fed began cutting rates in September 2024, the 10-year US Treasury yield jumped by about 100 basis points within three months, which starkly contrasted past cycles when yields typically fell by 25-50 basis points.

The report analyzes that this bond sell-off was mainly triggered by two unexpected factors:

Clouds of fiscal expansion: As the 2024 US presidential election approached, markets began to price in a “Republican sweep.” According to the Committee for a Responsible Federal Budget (CRFB) at the time, Trump’s campaign agenda could add nearly $8 trillion in deficits over ten years. Concerns over massive future Treasury supply drove the term premium from a low near 10 basis points to about 80 basis points.

Sharp reversal of economic data: In Q3 2024, economic data were generally disappointing, even with soaring unemployment rates, triggering the “Sahm Rule” recession signal. The market once expected a deep Fed rate cut, with market pricing showing policy rates falling to 3% within a year. However, in the following months, economic data rebounded strongly, unemployment stabilized and declined, and markets quickly corrected their pessimism about recession, which in turn drove up rates.

This Time Is Different: The Bar for Positive Economic Surprises Is Much Higher

Barclays points out that the biggest difference from 2024 is today’s optimistic market expectations for the economy.

Report data show the consensus expectation that US GDP will grow by around 2% in 2026, with about 90,000 new jobs per month. Barclays believes these expectations exceed the US’s potential growth rate, i.e., estimated potential GDP growth is about 1.5% and employment breakeven is 0-50,000 per month.

Against this backdrop of “high expectations,” it’s extremely difficult for economic data to surprise to the upside again. The report further analyzes:

AI investment growth slowing: Although capex in AI is still rising, its growth rate is expected to slow, and its contribution to GDP growth will decrease.
Weaker fiscal stimulus: Considering factors like tariffs, overall fiscal policy is unlikely to be a net stimulus. According to Barclays, the budget deficit as a percentage of GDP will shrink from around 6.2% in 2025 to 5.7% in 2028. Market consensus expects 6.5% in 2026 and 2027, above Barclays’ own shrinking forecast.
Limited wealth effect: Savings rates are already below pre-pandemic levels, so household net assets would have to keep growing above expectation to support consumption rising faster than income, which isn’t easy.

This Time Is Different: Fiscal Expansion Has Been Priced In, Duration Supply Shock Eases

On fiscal policy, Barclays also sees the likelihood of another large-scale surprise as very low.

First, the market already expects high deficits in coming years (consensus is 6.5% of GDP in 2026 and 2027). Second, the midterms are still far off, and the political landscape is very uncertain, making short-term expectations of fiscal expansion hard to form.

More importantly, the report emphasizes that statements from US Treasury Secretary Bessant have weakened the direct link between fiscal deficits and long-term bond supply. Bessant has publicly questioned the need to increase long bond issuance under current rates, hinting the Treasury may prefer relying more on short-term T-bills for funding. This means that even if deficits overshoot, it may not translate into a supply shock to long-duration Treasuries.

Different Starting Point: Higher Risk Premium and Robust Overseas Demand

Barclays also points to several key differences in market initial conditions:

Term premium already high: Currently, the 10-year US Treasury term premium based on the Kim Wright model is about 50 basis points, compared to near zero in September 2024. This gives investors a thicker safety cushion for holding long-term bonds and means there’s limited room for further big increases.
Easing expectations are milder: The market has largely accepted a “shallow, tentative” rate-cut cycle, with priced cuts much smaller than last year’s pessimistic expectations.
Foreign demand remains strong: Even with higher yields globally, overseas demand for US Treasuries remains robust. US Treasury data shows that in the three months through July 2025, foreign investors bought $110 billion per month in US long-term fixed-income products on average, higher than the prior 6- and 12-month averages.
Japanese investors unlikely to sell en masse: The report specifically analyzes Japanese investors. Since their overseas bond holdings have shifted to more passive trust accounts, and as hedged Treasury yields could become more attractive by mid-2026, it’s unlikely we’ll see large amounts of funds returning to Japan or big Treasury sell-offs.

Barclays’ Bottom Line: Yields Will Decline Gradually, Not Spike

Taking all these factors together, Barclays concludes: the most likely scenario is for yields to gradually trend lower, not repeat 2024’s spike.

Their model shows that, factoring in the path of policy rates, a reasonable term premium (about 20bps), and swap spreads, the fair value of the 10-year Treasury should be 3.8% by end-2025, below the 4% level at time of writing.

Thus, Barclays maintains its recommendation to “go long US Treasury duration.” Of course, the report does note one risk: if Fed credibility is damaged—say, if it cuts aggressively while inflation remains sticky—long-term yields could still face upward pressure. But for now, that’s not their base case.

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The above content is from Chasewind Trading Desk.

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