The bond market is showing new signs of unpredictability as expectations over Fed rate cuts shift with every new piece of economic data.

Last week, Fed Chair Jerome Powell acknowledged that rate cuts for this year are being decided on a meeting-by-meeting basis. Therefore, it's not possible to predict how much the cost of borrowing will drop in 2024.

However, some investors continue to price in at least three rate cuts this year. This took the S&P 500 and other market gauges to record heights last week.

Investors priced in significant rate cuts for 2024 during the first two months, as inflation showed consistent signs of easing.

But rising prices from February's CPI report came in above economist expectations. And stronger than expected economic activity shows that inflation could be harder to tame than many had hoped.

Meanwhile, the fear of stagflation is weighing on optimism.

How Treasury Notes Are Reacting: Treasury yields, which come down with interest rate cuts, continue to hang on attractive levels.

The yield on the 10-year U.S. The Treasury note was 4.25% on Tuesday, keeping the cost of borrowing money high for prospective homebuyers looking to get into a mortgage, as well as for corporate borrowers.

The 30-year fixed mortgage rate is still gravitating around 7%, which is negatively affecting the U.S. housing market.

Yields on Treasury assets set the floor on mortgages and the general cost of borrowing, as mortgage lenders keep interest rates above bond yields in order to attract similar investors, who would otherwise just decide to invest in Treasury notes.

Yields on the 10-year note peaked at 5% in October of last year. They quickly dropped as it became apparent that the Fed's monetary policy was working. The 10-year Treasury yield went from 3.86% at the start of the year to today's 4.25%.

Investors today are more moderate in their rate cut expectations. Current yields continue to reflect expectations that the Fed will cut rates in the future. They are now expecting that prediction to come true on a longer timescale.

Investors continue to expect yields to drop. The only thing that could take yields back to October's heights would be if the market receives very strong signals of economic acceleration, taking inflation back up again.

Retail investors can gain diversified exposure to the bond market by purchasing bond ETFs. The largest ones include Vanguard Total Bond Market Index Fund ETF (NASDAQ:BND), iShares Core US Aggregate Bond ETF (NYSE:AGG) and iShares 20+ Year Treasury Bond ETF (NASDAQ:TLT).

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Bond Yields Continue To Reflect Rate Cuts, But One Caveat Is Keeping Them Above 4%