Kiplinger’s Economic Outlooks are written by the staff of our weekly Kiplinger Letter and are unavailable elsewhere. Click here for a free issue of The Kiplinger Letter or to subscribe for the latest trends and forecasts from our highly experienced Kiplinger Letter team.
Long-term interest rates remain in a narrow range. With President Trump’s deficit-widening fiscal bill working its way through Congress, Treasury investors have suddenly become nervous about the potential consequences. That, and inflation concerns provoked by tariffs, have caused long-term rates to move upwards in recent weeks, counteracting the fears of an economic slowdown that had been pushing them downward.
The potential impact of future government fiscal deficits has become a new worry for bond investors, along with the higher inflation that could be caused by tariffs. Large deficits mean that the supply of Treasury securities could, at times, be higher than investor demand for them. That would cause prices to decline and rates to rise. Whether Treasury auctions will be soft or not is usually unknowable in advance, and can catch investors unawares. The stock market also often reacts negatively when rates rise.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Don’t count on the Federal Reserve to bail out the financial markets. The Fed now has even more reasons to not cut rates, since it is also worried about the impact of fiscal deficits on future inflation. Previously, it also stood pat because it was uncertain about the direction of the economy. At the Fed’s May 7 policy meeting, Chair Jerome Powell repeatedly emphasized how uncertain the economic outlook is, and that he wasn’t going to commit to a direction on short-term rates until the impact of recent tariffs becomes clearer. The Fed is not likely to cut rates unless there is a clear slowdown in the economy, particularly in the labor market. Investors are expecting it to cut short-term rates twice this year, but they are likely to be disappointed. The next policy meeting for the Fed is June 18.
The Fed is allowing Treasury securities to mature and run off its balance sheet at $5 billion per month. But it is running off mortgage-backed securities at $35 billion per month. The central bank would like to get non-Treasuries out of its portfolio as much as possible, in order to avoid creating unintended influences on those asset markets over the long term. The disparate treatment of the Fed’s balance sheet may keep mortgage rates elevated a bit more than usual over the 10-year Treasury note’s yield.
Mortgage rates won’t be changing much for now. If the economy weakens, then they should ease a bit. Mortgage rates are still higher than normal, relative to Treasuries, but whenever the Fed cuts short-term rates again, it will boost banks’ lending margins, which should eventually lower mortgage rates a bit, too.
Top-rated corporate bond yields have edged down in tandem with Treasury yields, but low-rated bond yields have jumped with the rise in recession fears. AAA-rated long-term corporate bonds are yielding 4.9%. BBB-rated bonds, 5.6%. CCC-rated bonds have eased to 13.0% from their 15.2% peak in April, but they are still above their early March level of 12%.
Related Content
-
Energy-Efficiency Credits — Get ’Em While You CanGreen energy-efficiency credits are on the chopping block. These tax credits can be valuable, but you should upgrade your home sooner rather than later.
-
Retire in Japan: It Ain’t Easy, Unless You’re Very SpecialPeople find relocating to Japan worth the effort, as long as you can jump through those administrative hoops and be open to a flexible view of “retirement.”
-
My First $1 Million: Retirement Coach, 69, Sammamish, Wash.Ever wonder how someone who's made a million dollars or more did it? Kiplinger's My First $1 Million series uncovers the answers.
-
5 Father's Day Gift Ideas That Also Make Good Long-Term InvestmentsTies are tired. Try these growth-potential gifts instead.
-
Four Innovations That Reinvented Retirement as We Know It and Why AI Is NextA financial professional explores the innovations that have reshaped our lives over the years — and what the next revolution, AI, could mean for your legacy.
-
AI vs the Stock Market: How Did Tech Stocks, Palantir and Albemarle Perform in May?AI is a new tool to help investors analyze data, but can it beat the stock market? Here's how a chatbot's stock picks fared in May.
-
What Will They Remember About You? It's Not Just About Your MoneyOnce you retire is the prime time to ensure you leave a meaningful legacy, personally and financially. This financial planner suggests five steps to build a bridge between who you are and how you'll be remembered.
-
Stock Market Today: Stocks Bounce as US-China Tensions EscalateStocks were volatile to end the week and the month amid concerns a trade truce between the U.S. and China is splintering.
-
CVS Is Closing More Stores in 2025: What It Means for YouAs CVS Health continues its restructuring plan, additional store closures raise questions about access to pharmacy services and the future of retail healthcare.
-
The United and JetBlue Partnership: Everything We Know About Blue Sky So FarBlue Sky, the United and JetBlue partnership just announced, will give frequent fliers more ways to earn and use miles. Here's what you need to know.
