Can the U.S. Escape the UK Bond Yield Surge Pattern After September Fed Cut?

The global financial community is watching bond markets with heightened concern as the United Kingdom’s 30-year gilt yield surges above 5.70%, marking the highest level since April 1998. This spike comes despite a series of interest rate cuts by the Bank of England (BoE), leaving economists and investors puzzled about the structural health of the UK debt market.

Now, with the U.S. Federal Reserve expected to deliver its first interest rate cut of 2025 in mid-September, the pressing question arises: Will American markets experience the same paradox — falling policy rates alongside rising long-term yields?

Why Are UK Bond Yields Rising After Five Rate Cuts?

Traditionally, when central banks lower interest rates, borrowing costs across the economy decline. Long-term government bond yields, which set the tone for mortgages, business loans, and sovereign financing, typically move lower as well.

But the UK has defied that script. Despite five rate cuts in just twelve months, the yield on Britain’s 30-year government bond, known as a gilt, has surged to 5.70%. In practical terms, this means that lending money to the UK government for three decades is now more expensive than at any point in more than 25 years.

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Several factors are driving this unusual divergence:

• Persistent inflationary pressures — Core inflation has not eased as quickly as policymakers had hoped, raising fears that lower rates could reignite price pressures.

• Concerns over fiscal sustainability — Rising debt levels and widening deficits have undermined investor confidence in gilts.

• Market skepticism — Traders worry that the UK’s long-term growth outlook and debt burden may not justify lower yields, leading to a sell-off in long-dated bonds.

The result is a market dynamic that The Kobeissi Letter described as a red flag for the global system: “When you have higher rates with rate cuts, something is seriously wrong.”

The U.S. Federal Reserve Prepares for September Cut

On the other side of the Atlantic, the U.S. Federal Reserve is preparing to take a different step. After holding rates steady for much of 2024, markets are now pricing in a near 90% probability that the Fed will cut rates at its September meeting.

According to CME FedWatch data, the expected move would lower the federal funds target range from 4.25–4.50% to 4.00–4.25%.

This policy shift is being closely tied to:

• Cheaper credit for businesses and households, aimed at supporting growth.

• Higher liquidity in the financial system, which could boost risk assets including equities.

• Investor confidence, as markets historically view initial cuts as supportive for asset prices.

However, skeptics warn that the U.S. may not be immune to the same pressures now roiling the UK. The 10-year Treasury yield remains near 5.00%, suggesting bond traders are cautious about embracing a lower-rate environment.

U.S. vs UK: A Tale of Two Bond Markets

The divergence between the two economies underscores key structural differences:

• United Kingdom: Rate cuts have failed to lower yields, signaling deep structural fragility in government debt markets.

• United States: Optimism around the Fed’s easing cycle suggests markets still trust in Treasuries, but risks remain if inflation proves sticky.

This contrast raises a crucial question: is the U.S. truly insulated, or simply delayed in facing the same paradox?

Why Yields Could Stay High Even After Fed Cuts

Economists point to several reasons why U.S. bond yields might remain elevated despite a September rate cut:

1. Sticky Inflation
   Price pressures, especially in housing and energy, remain stubborn. If inflation expectations rise, investors will demand higher yields to compensate.

2. U.S. Debt Load
   Federal deficits are projected to remain above $1.5 trillion annually for the foreseeable future. Higher borrowing needs could keep long-term yields under pressure.

3. Global Investor Sentiment
   If investors view Treasuries as riskier — similar to the UK gilts scenario — they may demand higher returns even as short-term policy rates decline.

4. Geopolitical Risks
   Tensions in global supply chains, energy markets, and elections in key economies could amplify uncertainty, driving volatility in bond markets.

What This Means for Investors

The potential divergence between short-term rate policy and long-term bond yields has major implications:

• For Equity Markets: If yields stay high, valuations on growth stocks may come under pressure despite lower Fed rates.

• For Housing: Mortgage rates are tied to Treasury yields. If yields don’t fall, housing affordability could remain a challenge.

• For Corporate Borrowing: Companies may face continued pressure on long-term financing costs.

• For Global Capital Flows: Emerging markets could see volatility if U.S. yields stay elevated and attract global funds back to American assets.

The Gold and Bitcoin Hedge

One of the clearest market reactions to rising bond yields has been a shift toward alternative assets.

• Gold continues to be the traditional hedge against inflation and sovereign debt concerns. Prices have already risen in anticipation of continued fiscal instability.

• Bitcoin is increasingly viewed as a “digital safe haven.” Its correlation with liquidity conditions means it could benefit if investors lose faith in Treasuries as a reliable store of value.

Analysts suggest that if both the UK and the U.S. enter a paradox of “rate cuts plus higher yields,” capital could flow more aggressively into these alternative assets.

Key Takeaway: Is the Treasury Playbook Broken?

The events unfolding in the UK suggest that traditional assumptions about bond markets may no longer hold. Central banks can lower rates, but that does not guarantee falling long-term borrowing costs if investor confidence in fiscal and monetary credibility is shaken.

The U.S. now faces its own test. If September’s rate cut fails to push Treasury yields lower — or worse, if yields rise further — it could indicate that America is entering the same storm Britain currently navigates.

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Ultimately, this is not just about rate cuts or yields. It is about trust — trust in governments to manage debt responsibly, trust in central banks to contain inflation, and trust in bond markets as stable financial anchors.

If that trust erodes, the old rules of monetary policy may no longer apply. And in that scenario, the real winners may not be Treasuries at all, but alternative assets such as gold and Bitcoin.

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