Kiplinger Interest Rates Outlook: Long-Term Rates Will Keep Fluctuating With Oil Prices
The longer the Iran war goes on, the more likely there will be rate increases by the Federal Reserve.
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Upward pressure on long-term bond rates will continue as long as the Iran war lasts. Ten-year Treasury yields have risen from 4.5% to 4.7% so far in July, and will keep edging upward as long as high crude oil prices threaten to bleed into the rest of the economy through knock-on effects. At the time of this writing, the Iran conflict appears to be widening, with Iran’s proxy militant group in Yemen, the Houthis, now threatening the Red Sea, and the Iranian Revolutionary Guard acting independently of Iran’s government. A negotiated settlement appears far off. If a cease-fire is reached and doesn’t break down the way the first one did, then the 10-year Treasury’s yield will return to 4.5% or a little less. Without any sort of peace deal, it may approach 5.0% by the end of the year.
The Federal Reserve’s policy committee meets again on July 29. Expect it to leave short-term rates unchanged then, but the continuing war has added pressure to raise rates later. The Fed’s fear is that a lengthy period of high crude oil prices will raise costs for both businesses and consumers, and will eventually boost other prices by raising transportation costs, kicking off a new bout of higher inflation. Fed Chairman Kevin Warsh has gone on record in his recent congressional testimony stating emphatically that he and the policy committee will deliver price stability. Warsh really does not want to raise interest rates, but his own rhetoric and pressure from other committee members may box him in. Expect the Fed to raise rates at least twice this fall if there is no near-term cease-fire.
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Mortgage rates are edging up again with Treasury yields. Thirty-year fixed-rate mortgages are currently around 6.6%. Fifteen-year loans are at 6.0% for borrowers with good credit. If a cease-fire halts the Iran war, then mortgage rates will likely end 2026 at around 6.5%; otherwise, they may approach 7.0%.
Top-rated corporate bond yields have also been following Treasury yields. AAA-rated long-term corporate bonds are yielding 5.3%, BBB-rated bonds are at 5.6%, and CCC-rated bonds are at 14.6%. CCC-rated bond rates tend to rise when the risk of an economic slowdown mounts, and fall when either the economy strengthens or the Fed cuts short-term interest rates, which eases financing costs for businesses that are heavily indebted.
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