The US Federal Reserve (Fed) keeps forecasting that interest rates will be coming down later in the year, but the most important yield in global finance, that of US Treasuries, keeps rising. Treasury yields are the key driver of mortgage rates and other borrowing costs.
As of late March, the yield on the benchmark 10-year US Treasury note was 4.23%, up from 3.86% at the end of last year. As a result, the average rate on a 30-year fixed mortgage home loan has also risen higher, as has the cost of borrowing in the corporate bond market.
The climb has surprised some, who had expected yields to fall, and frustrated Americans who have been waiting for mortgage rates to ease from two-decade highs. But it illustrates the continuing uncertainty over the direction Treasury yields might take.
Source: Wall Street Journal
Yields on Treasuries, which rise when bond prices fall, largely reflect what investors think the Fed’s benchmark short-term rate will average over the life of the bond. They in turn set a floor on mortgage rates and other types of fixed-rate debt.
Right now, the Fed’s short-term rate sits in at 5.5%, a 23-year high. Coming into 2024, investors expected the Fed to cut that rate six times this year, bringing it down to 4.0%. But then inflation readings for January and February came in higher than expected, and economic growth has proved resilient, forcing investors to dial back their rate-cut bets. Now, traders expect rates to end the year between 4.5% and 4.75%.
The Fed is still signalling cuts. A recent survey of Fed officials showed that their median forecast is for 3 cuts this year, unchanged from December. Treasury yields, however, have climbed as investor expectations have come more in line with the Fed’s projections.
Even if the Fed cuts rates this year, Treasury yields could rise further. Investors would just need to keep scaling back bets on how much they think the Fed will cut in 2024 and beyond.
The world’s largest and most important financial market is still growing rapidly. Annual issuance of US Treasuries has nearly doubled since the pandemic. The government sold a record $23 trillion worth in 2023. And few think the trend is going to slow soon, given the widespread expectation that government spending will continue to rise regardless of who wins November’s elections.
Source: Wall Street Journal
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