Insights 
VT 
Deutsche Bank has analysed how rate cuts influence long-term borrowing costs differently from overnight rates set by the Federal Reserve. Historical data indicates a weak link between these rates, as evidenced by a recent chart. Despite a year into the Fed’s rate-cutting cycle, current yields remain similar to pre-cycle levels.
Historical Performance Of Rate Cutting Cycles
From 13 rate cutting cycles starting in 1966, the 10-year yield decreased 6 times and increased 7 times. With today’s yields higher than the start of the cycle, 8 out of 14 cycles now show higher yields. Notably, the lowest 10-year UST yield since May 2023 occurred just before the current cycle began. Historical patterns suggest bond selling might be more advantageous at the beginning of a rate-cutting period.
Different cycles are influenced by distinct circumstances like Covid or the Vietnam War. Deutsche Bank has pointed out parallels with the 1966 policy situation, characterised by low unemployment, larger budget deficits, and eased monetary policies. This era of 1966 is particularly interesting due to its similarity to current conditions. With these insights, Deutsche Bank has recently advised the sale of 10-year notes.
We’ve seen the Federal Reserve cut the fed funds rate three times since September 2024, for a total of 75 basis points. Yet, the 10-year Treasury yield is hovering around 4.3%, almost exactly where it was a year ago. This shows the market is not convinced that lower short-term rates will stick.
Looking back at the last 14 rate-cutting cycles, we see that a year in, the 10-year yield was actually higher in 8 of them, including this one. This historical pattern suggests that unless a major economic crisis hits, the path of least resistance for long-term yields might be sideways or even slightly up. The market is pricing in factors beyond just the Fed’s overnight rate.
Strategies For Traders
For derivative traders, this suggests that shorting 10-year Treasury note futures (ZN) could be a viable strategy in the coming weeks. With the latest core PCE inflation data for August 2025 coming in unexpectedly hot at 3.1%, the bet is that bond prices will fall as yields rise to reflect persistent inflation. A more risk-defined approach would be to buy put options on these futures, limiting potential losses.
Another strategy involves interest rate swaps, specifically paying a fixed rate to receive a floating one. This position profits if short-term rates, which influence the floating leg, stay higher for longer than the market anticipates. This scenario echoes the policy error of 1966, when the Fed eased into a low unemployment economy with high government spending, ultimately causing inflation and long-term rates to surge.
The clear disconnect between Fed policy and long-term yields is creating uncertainty, which points towards higher bond market volatility. The MOVE Index, which tracks Treasury volatility, has already climbed from a low of 95 in July 2025 to over 115 this week. Traders could use options strategies like long straddles on Treasury futures to profit from a large price move in either direction, betting on a decisive break rather than a specific direction.
