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Two poor employment reports in a row will force the Federal Reserve to cut its benchmark interest rate by a quarter-point at its next policy meeting on September 17. One or two more rate cuts will also occur at the last two meetings of the year. Inflationary concerns will take a back seat to worries about a slowing economy for a while. Fed Chair Jerome Powell had previously emphasized that the Fed wasn’t cutting rates as long as inflation was above target and the labor market was still solid. But the weak jobs reports of recent months undercut the latter half of that narrative.
The 10-year Treasury rate has dropped to 4.0%, and may dip further, depending on future job reports, but will at some point rebound somewhat due to ongoing inflation reports that are still too high, plus renewed focus on the mounting borrowing needed to finance the federal government’s deficits. The 10-year yield is often used as the benchmark for setting mortgage and auto loan rates.
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The bond market’s yield curve will become fully upward sloping sometime next year. Bond investors’ concern that an economic slowdown looms is shown by the fact that current one- to seven-year Treasury notes have lower yields than short-term Treasury bills that mature in a few months. But 20- and 30-year bond yields have picked up by more than the 10-year yield in recent months, indicating that both long-term inflation and government deficits are a rising concern among bond traders. The result is a U-shaped yield curve, with higher short and long yields than medium-term ones. As the uncertainties of tariff policy gradually get resolved, fears of a recession will diminish and medium-term rates are likely to pick up. The long end of the yield curve is likely to stay elevated. We expect short rates to fall next year, so the yield curve by the end of 2026 is likely to be consistently upward sloping along its entire length, for the first time since 2021.
Mortgage rates have dipped this month as the lack of hiring in the labor market has fueled recession concerns and weighed on the 10-year Treasury’s yield. 30-year fixed-rate mortgages are currently around 6.3%. 15-year loans are at 5.5% for borrowers with good credit. If the economy weakens more, then rates should decline further. Mortgage rates are still higher than normal relative to Treasuries, but whenever the Fed cuts short-term rates again, that will boost banks’ lending margins, which should eventually lower mortgage rates a bit, too.
Top-rated corporate bond yields have also been following Treasury yields. AAA-rated long-term corporate bonds are yielding 4.5%, BBB-rated bonds are at 4.9%, and CCC-rated bonds recently eased to 11.6%. CCC-rated bond rates tend to rise when the risk of recession rises. The fact that they declined, despite the worries about the economy slowing, is likely due to hopes for more Fed rate cuts. That could ease the financial burden of businesses that are heavily indebted.
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