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**Yields Likely to Dip Further Before Rising Again as Inflation Risks Reassert**
Following several weeks of weak labor market data, the Federal Reserve is expected to implement a widely anticipated quarter-point rate cut today, signaling the beginning of a new easing cycle. Investors have seen a similar scenario before. In September 2024, the Fed started cutting rates from a 5.5% ceiling, initiating a 50-basis-point reduction followed by two successive quarter-point cuts. However, instead of a steady downward trend, the 10-year Treasury yield surged approximately 120 basis points between September and December, reversing its earlier decline.
This historical episode underscores the risk of a yield overshoot. After bottoming around 3.15% last fall, the 10-year Secured Overnight Financing Rate (SOFR) climbed toward 4.30%, while the 10-year Treasury yield peaked near 4.80% by year-end. A similar pattern could repeat itself—initially, yields may dip as markets respond to a dovish Fed, only to rebound as inflation concerns, fiscal pressures, and economic resilience reemerge.
Back in September 2024, inflation had moderated to around 2.5% and appeared to be on a continued downward trajectory. Today, however, the inflation picture is less reassuring. It is running close to 3%, with expectations of a further rise in the months ahead due to the impact of new tariffs. Simultaneously, fiscal policy challenges have intensified: tariff revenues have fallen below expectations, 2026 tax cuts are on the horizon, and government spending remains unchecked. Together, these factors set the stage for increased long-term yield pressure, even if short-term yields move lower.
**Down First?**
The market appears poised for a “down first” phase. The 10-year Treasury yield, currently hovering near the psychologically significant 4% level, may break lower in the near term, potentially reaching around 3.75%. This would correspond to a 10-year SOFR rate trough near 3.25%, assuming a Fed funds rate floor of 2.75%–3.00% by the end of the current easing cycle and a typical 50-basis-point spread over the policy rate. With the current SOFR rate at 3.55% and forward inflation expectations still not fully validated, markets might temporarily tolerate very low—or even negative—real interest rates.
Nevertheless, these lower rates are unlikely to be sustained. Should inflation levels drift toward 3.5%, as many analysts anticipate, investors may reassess the pricing of real yields. Even if additional tariffs act more as a one-time price shock than a persistent inflation driver, deeply negative real returns may become increasingly difficult to justify. In such a situation, the 10-year SOFR could climb above 3.5%, while the 10-year Treasury yield may rise toward 4.5%, reflecting a more balanced risk profile and reintroducing term premium into the curve.
This expectation aligns with prior market cycles. Historically, a 100-basis-point spread between the Fed funds rate and the 10-year SOFR rate—or a 150-basis-point spread to the 10-year Treasury yield—has been typical. Term premiums of 150 to 200 basis points have characterized past cycles. Thus, although bond markets may rally briefly as rate cuts begin, structural inflation pressures and growing fiscal concerns suggest long-term yields are likely to rise again.
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