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The 10-year Treasury note’s yield dipped today after a weak employment report was released. For the moment, concerns about a possibly weakening economy are outweighing concerns about soaring government deficits and inflation provoked by tariffs. The 10-year yield will likely be depressed for a time until more economic data come in that either confirm or dispel fears of an ongoing slowdown. The 10-year Treasury is often used as a benchmark for mortgage and auto loan rates.
The Federal Reserve would like to wait to cut short-term rates until closer to the end of 2025, but the odds of a cut at the next meeting, on September 17, have just gotten stronger. Fed Chair Jerome Powell just emphasized on July 30 that the Fed wasn’t cutting because inflation is above target and the labor market is still solid. But the weak jobs report on August 1 has undercut the latter half of that narrative, and may force his hand. Between now and September 17, the Fed will certainly be on the lookout for confirmation of any worsening economic slowdown in other data. At the very least, there should be a lively discussion at the September meeting. Powell could signal in which direction he is leaning during his August 22 speech at the Jackson Hole symposium on monetary policy, which the Fed sponsors every year.
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The yield curve will become upward-sloping sometime next year. The bond market’s concern that there will be an economic slowdown 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 rates have picked up more than the 10-year rate in recent months, indicating that both long-term inflation and government deficits are rising concerns among bond investors. The result is a U-shaped yield curve currently, 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, however. 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 should dip slightly this month in response to the decline in the 10-year note’s yield. 30-year fixed-rate mortgages are currently around 6.7%, having changed little during the past nine months. 15-year loans are at 5.9% for borrowers with good credit. If the economy weakens more, then rates should also ease 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.
Top-rated corporate bond yields have also been following Treasury yields. AAA-rated long-term corporate bonds are yielding 4.8%, BBB-rated bonds are at 5.3%, but CCC-rated bonds bumped up to around 12.5% on the weak employment report. CCC bond rates tend to rise when the risk of recession rises.
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