Core Viewpoint - The divergence in short-term and long-term U.S. Treasury yields poses significant challenges for the Federal Reserve's traditional policy of stimulating economic growth through interest rate cuts [1][3][10] Group 1: Yield Divergence - The current issue in the U.S. Treasury market is the significant divergence in yield trends, with short-term Treasury yields declining while long-term yields are rising [1] - As of April 2, the benchmark 10-year U.S. Treasury yield has risen to approximately 4.38%, contrasting with the decline in short-term yields [1] Group 2: Factors Driving Yield Divergence - The primary reason for this yield divergence is the uncertainty surrounding inflation, exacerbated by unpredictable trade policies [4] - Investors are demanding higher yields to compensate for the risks associated with holding long-term Treasuries, leading to an increase in the "term premium" [4] Group 3: Impact on Borrowing Costs - This yield divergence directly raises borrowing costs for consumers and businesses, complicating the Federal Reserve's efforts to stimulate the economy through rate cuts [3][10] - The average rate for a 30-year fixed mortgage was 6.8% last week, slightly up from a month ago, indicating persistent high borrowing costs despite potential rate cuts [6] Group 4: Federal Reserve and Policy Implications - Most investors believe that if the U.S. enters a recession and the Federal Reserve significantly cuts rates, long-term yields should theoretically decline [6] - However, there are concerns that long-term yields may not decrease sufficiently, keeping mortgage and other debt rates high [6][10] Group 5: Cautious Policy Response - The Federal Reserve is exercising caution in its monetary policy decisions, with Chairman Powell emphasizing the need to maintain credibility in combating inflation [8] - The U.S. Treasury has shown increased sensitivity to market conditions, adjusting its debt issuance strategy in response to rising long-term yields [9]