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The 10-year Treasury note’s yield will remain in a narrow range for now. Concerns about soaring government deficits and inflation provoked by tariffs, which tend to push bond yields up, are being balanced by worries about a slowing economy, which tend to push yields down. The 10-year Treasury is often used as a benchmark for mortgage and auto loan rates.
The yield curve will become upward-sloping sometime next year. The bond market is still concerned that there will be an economic slowdown, as shown by the fact that current one- to seven-year Treasury notes have lower yields than short-term Treasury bills, which 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 a rising concern 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.
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The Federal Reserve is not likely to cut short-term rates until closer to the end of 2025. Fed Chair Jerome Powell has emphasized that the Fed won’t cut rates until it has a better understanding of how higher tariffs affect consumers’ longer-term inflation expectations. Because price effects from tariffs take time to work through the supply chain to the consumer, that clarity will not come soon. Even though tariffs have had only a small impact on inflation so far, Powell has noted that all professional forecasters expect them to boost inflation this year, at least temporarily. Because of the danger that these price increases could affect longer-term inflation expectations, he feels that it is necessary to maintain a moderately restrictive monetary policy for now. The Fed’s next meeting is July 29-30.
Mortgage rates won’t be changing much. 30-year fixed-rate mortgages are 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, then rates should ease a bit. 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 treading water, along with Treasury yields. AAA-rated long-term corporate bonds are yielding 4.9%, BBB-rated bonds are at 5.3%, and CCC-rated bonds have eased to 12.5% from their 15.2% peak in April on reduced recession fears.
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