Economic News Drives Up the 10-Year Yield With 5% in Sight

A recent series of economic reports have dampened the chance of immediate Federal Reserve rate cuts. As a result, the yield of the 10-year Treasury has shifted into a big jump to 4.7% since Thursday, April 25. This is good for those lending money or investing in fixed income but bad news for CRE owners, investors, and developers.

It’s not that the economic fundamentals are necessarily bad. As Roger Aliaga-Diaz, Vanguard global head of portfolio construction said in an emailed note on Friday, “[Y]esterday’s weaker-than-expected headline number for first-quarter U.S. GDP overshadowed a strong underlying report, with continued robustness of organic drivers to growth such as consumer spending, business capital expenditures, and housing. We continue to foresee full-year 2024 growth at least slightly above trend.”

But there is more going on. “Sticky core inflation as reflected in today’s Personal Consumption Expenditures index reading for March underscores Vanguard’s belief that the Federal Reserve may find it’s unable to cut interest rates this year,” Aliaga-Diaz wrote. “We’ve long held that the neutral rate of interest—the theoretical rate that neither stimulates nor restricts an economy—is higher than many may believe. The ultra-low interest rates of the pre-COVID era are history.”

Vanguard’s view of the neutral rate of interest has been around since at least 2023, when a report from its Investment Strategy Group said that the 0.6% level the Fed has thought was neutral rate should likely have been 1.5%.

Reuters reports that “some investors are preparing for the 10-year U.S. Treasury yield to breach a 16-year high of 5% hit last October.” The 4.7% rate that it hit earlier this week is a five-month high. Now, an intermittent high is just that, something in the middle that may not ultimately matter. But this is a trend since December 28, 2023. That’s likely not an inadvertent result of tempestuous and fickle volatility.

As Oxford Economics put it in an email on Friday: “Odds are that there will not be anything from the upcoming meeting of the Federal Open Market Committee that would alter our baseline forecast for the first rate cut to occur in September, followed by another cut in December. We recently revised our forecast for the fed funds rate and, given the incoming data on inflation, risks are weighted toward fewer cuts this year.” Three, then two. What happens after the next inflation report/?

As mathematical as finance seems, it’s ultimately a product of emotion, as people worry about the future and whether they’re making the right move now. JPMorgan Chase chief executive Jamie Dimon is worried about the possibility of stagflation, where inflation and unemployment are high, and growth is slow.

Before the 1970s, this wasn’t a combination economists considered. If people are unemployed and growth, slow, how can there be high inflation? Well, inflation is increasing, growth is slowing, but unemployment is at historically low levels.

Perhaps the current situation is another that could break ground. Because of various conditions, including a large workforce segment that is aging and retiring, maybe higher inflation, slow growth, and low unemployment are possible.