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Long-term bond yields have fallen below 5% as the Federal Reserve appears to be ending its rate hikes amid signs of a cooling labor market and economy. Long rates may rise again in the future, but likely not until later next year, after the slowdown in the economy passes.
Mortgage rates should be coming down a few tenths of a percentage point, as well. Thirty-year fixed rates had come close to 8.0%, and 15-year fixed rates had risen to over 7.0%. Mortgage rates typically move with the 10-year Treasury note’s yield, but are higher now than what would be normal in relation to the Treasury yield. The recent rise in short-term rates has crimped lenders’ profit margins on long-term loans. If the Fed cuts short-term rates next year, that should cause some extra reduction in mortgage rates.
We think the Federal Reserve will leave its benchmark short-term rate alone at its next policy meeting, on December 13, and that it is likely finished raising rates for now. The Fed will view the recent rise in long-term bond yields as having created an additional slowing effect on the economy, and so will not feel the need for another short-term rate increase. But the Fed is not likely to cut rates until the second half of 2024 since it wants to make sure inflationary pressures have ceased. Chair Powell has repeatedly emphasized that it would be a mistake to cut rates too soon and risk letting inflation rebound. Also, he has indicated that the long-run “neutral” policy rate (the level consistent with stable inflation) may be higher than previously expected, which would mean fewer Fed rate cuts over the long run.
Other short-term interest rates have risen along with the federal funds rate. For investors, rates on super-safe money market funds have risen above 5%. Rates for borrowers have ticked up, as well. Rates on home equity lines of credit are typically connected to the prime rate (now 8.5%), which in turn moves with the federal funds rate. Rates on short-term consumer loans such as auto notes have also been affected. Financing a new vehicle now costs around 7.4% for a six-year loan, and 11.4% for a used vehicle.
Corporate bond rates are also beginning to ease a bit with the decline in Treasury rates. Higher-rated bonds’ yields had ticked up on expectations of a better economy and stronger inflation, while lower-rated bonds’ yields had risen due more to concerns about the financial health of borrowers with heavy debt loads. AAA-rated bonds are now yielding 5.3%. BBB bonds are averaging 6.4%, while CCC bonds’ yields are at 14.9%.
David is both staff economist and reporter for The Kiplinger Letter, overseeing Kiplinger forecasts for the U.S. and world economies. Previously, he was senior principal economist in the Center for Forecasting and Modeling at IHS/GlobalInsight, and an economist in the Chief Economist's Office of the U.S. Department of Commerce. David has co-written weekly reports on economic conditions since 1992, and has forecasted GDP and its components since 1995, beating the Blue Chip Indicators forecasts two-thirds of the time. David is a Certified Business Economist as recognized by the National Association for Business Economics. He has two master's degrees and is ABD in economics from the University of North Carolina at Chapel Hill.
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