Kiplinger Interest Rates Outlook: Long Rates Still Under Pressure
The Federal Reserve hikes short-term interest rates, and long rates rise some more.
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.
The Federal Reserve on September 16 raised its benchmark short-term interest rate by a quarter-point for the first time in three years, while Chairman Kevin Warsh’s tough inflation talk at his press conference boosted long rates above 5.0%. Bond investors likely interpreted his words as a promise to raise rates more than they had expected over the next year. The market is expecting two to three more quarter-point hikes over that time. The next hike is likely to be in December, as the Fed is unlikely to raise rates at its next meeting, on October 28, just prior to the midterm elections.
The September 16 Fed policy meeting did tell us one thing about Warsh: That he has settled on conventional rate increases as his primary means of fighting inflation. That means that costs for consumers and businesses to borrow short-term will be going up. It also shows that he is willing to back up his tough talk with rate hikes. But despite that, he doesn’t give the impression of being a dyed-in-the-wool hawk, so there may be a few surprises for investors down the road.
From just $107.88 $24.99 for Kiplinger Personal Finance
Become a smarter, better informed investor. Subscribe from just $107.88 $24.99, plus get up to 4 Special Issues
Sign up for Kiplinger’s Free 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.
Upward pressure on long-term bond yields will continue as long as the Iran war lasts. Ten-year Treasury yields are at 5.0%, and will keep edging higher as long as expensive gasoline and diesel threaten to raise costs across the rest of the economy. If a cease-fire is reached and doesn’t break down, then the 10-year Treasury’s yield could decline by a few tenths of a point. But there is an additional reason for upward pressure on rates: heavy borrowing by the main contestants in the artificial intelligence race. Corporate debt now competes with U.S. Treasury bonds for investors’ capital. Corporate bond issuance was $1.9 trillion through the end of August, up 30% from a year ago, and by the end of this year will have topped $2 trillion for the first time. That’s equal to a quarter of the total issuance of U.S. Treasuries this year, around $8 trillion.
Mortgage rates are edging up again in tandem with Treasury yields. Thirty-year fixed-rate mortgages are approaching 7.0%, and 15-year loans have crossed the 6.0% threshold for borrowers with good credit. Mortgage rates tend to follow the Treasury’s 10-year note. But mortgage rates seem unlikely to rise much above 7.0%.
Top-rated corporate bond yields have also been following Treasury yields. AAA-rated long-term corporate bonds are yielding 5.6%, BBB-rated bonds are at 5.9%, and CCC-rated bonds are at 15.6%. CCC-rated bond rates tend to rise when financial conditions tighten, 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.
Related Content
