Why Treasury Yields Are Rising Despite Rate-Cut Expectations

Despite expectations for interest rate cuts by the Federal Reserve, Treasury yields have been on the rise, influencing mortgage rates and other fixed-rate debts. The 10-year U.S. Treasury note yield has climbed from the end of last year, reaching 4.252% as of Monday. This surge, contrary to predictions, is attributed to firmer-than-expected inflation readings and resilient economic growth, prompting investors to reassess their forecasts and reduce bets on rate cuts. Consequently, Treasury yields have increased as investor expectations align more closely with the Fed’s projections.

President Biden’s remarks on falling inflation and mortgage rates have added to the complexity of the situation. Even if the Fed implements rate cuts, Treasury yields could continue rising as investors adjust their expectations for future rate cuts downward. While there is anticipation for yields to fall, with many investors believing that reaching 5% again would be challenging, uncertainties about economic growth and inflation trajectory keep the market dynamic. Real estate investors should closely monitor these developments, recognizing that Treasury yields impact borrowing costs and ultimately influence investment decisions in the real estate market.

Our take (from the Straight to Smart newsletter):

The Elephant in the Room

Article Excerpt:

The Federal Reserve keeps promising interest-rate cuts. Treasury yields, a key driver of mortgage rates and other borrowing costs, keep rising anyway.

As of Monday, the yield on the benchmark 10-year U.S. Treasury note was 4.252%, according to Tradeweb, up from 3.860% at the end of last year. As a result, the average rate on a 30-year fixed mortgage has also ticked higher, as has the cost of borrowing in the corporate-bond market.

The climb has surprised many on Wall Street, 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 nuances of how borrowing costs are determined in the U.S., and the continuing uncertainty over the path they might take.

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