Kiplinger Interest Rates Outlook: Long-term Rates to Remain Elevated as Long as Oil Prices Cause Inflation Risk
The bond market fears a replay of 2022, when inflation surprised to the upside.
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The pressure on long-term interest rates has been upward since the Iran war started, because bond markets fear rising energy prices will filter into other prices, as they did back in 2022, during the supply chain shortages. Ten-year Treasury rates are currently at 4.3%, up from 4.0% before the war. The upward trend is beginning to slow because of hints of movement toward some kind of political deal that could allow tanker traffic through the Strait of Hormuz in the Persian Gulf. However, events are often unpredictable in war, and it’s not clear whether the Iranian side is willing to accept a deal. Currently, the United States is not able to protect tanker travel through the strait, but U.S. capabilities may improve over time.
The Federal Reserve kept short-term interest rates unchanged at 3.5% to 3.75% at its policy meeting on March 18. Chair Jay Powell cited possible further pressure on prices from tariffs and the quick rise in oil prices. The Fed is also concerned about preventing a repeat of 2022, since it was widely blamed for not acting more aggressively in raising rates to dampen inflation. Bond traders are wondering if the Fed might be considering possible rate increases later this year. Whether it does or not will depend on how quickly the pressure on oil prices can be resolved.
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The bond market’s yield curve became fully upward-sloping in mid-March, for the first time since 2021. Investor concerns about the impact of current events on inflation over the next two to three years have lifted the middle of the curve. Previously, concerns about slow economic growth had depressed these rates. But the economy seems to keep chugging along, despite the slowdown in hiring.
Mortgage rates are rising again as the 10-year Treasury’s yield has risen. Thirty-year fixed-rate mortgages are currently around 6.3%. Fifteen-year loans are at 5.6% for borrowers with good credit. If the economy weakens, then rates should decline, but odds are that rates at the end of 2026 will be close to where they are today.
Top-rated corporate bond yields have also been following Treasury yields. AAA-rated long-term corporate bonds are yielding 4.9%, BBB-rated bonds are at 5.3% and CCC-rated bonds are at 13.7%. CCC-rated bond rates tend to rise when the risk of recession rises, and fall when either the economy strengthens or the Fed cuts rates, which eases financing costs for businesses that are heavily indebted.
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