Judy T. from Dallas, TX asks: Mitch, there’s pretty much constant talk about interest rates falling this year, with the Federal Reserve cutting borrowing rates. But I’ve noticed that Treasury bonds keep going up, which seems like the opposite of what should be happening. Can you explain?
Mitch’s Response:
Thank you, Judy, that’s a sharp observation. To provide readers with context, we can take a look at a chart of the 10-year U.S. Treasury bond over the past couple of years. As seen below, the trendline is positive—yields have soared from around 1.5% two years ago to over 4.0% today. And since the beginning of 2024, when the notion of rate cuts became more definitive than hypothetical, 10-year Treasury bond yields crept up about 30 basis points.
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So, to your point, when investors and consumers were expecting borrowing costs like mortgage rates, credit card rates, and corporate bond rates to fall, they’ve risen instead. What gives?
There are a few factors at work. The first one to consider is that Treasury bond yields largely reflect investor expectations about the fed funds rate over the life of a bond. At present, the Fed funds rate is between 5.25% and 5.5%, and investors have been in the process of recalibrating expectations. First, it was six rate cuts, now it’s three. Treasury yields have followed suit essentially, rising as investor expectations for the Fed funds rate have risen too.
Another factor keeping a bit of upward pressure on the 10-year is the end of quantitative easing (QE) and the Fed’s shrinking balance sheet. During the era of QE, the Fed was a major buyer of mortgage securities and Treasury debt, which kept upward pressure on bond prices (and downward pressure on yields). Now that the reverse is happening, there’s less demand, meaning less upward pressure on price.
In terms of what factors could keep upward pressure on 10-year U.S. Treasury bond yields from here, it’s really about inflation and economic growth. If inflation and/or economic growth accelerates in 2024, it would pressure the Fed to keep short-term rates elevated, which would cause investors to again scale back bets on rate cuts. That could keep the 10-year U.S. Treasury bond in the 4% to 5% range.
Last week brought some good news on that front—the Fed’s preferred inflation gauge, the PCE price index, came in at 2.5% year-over-year. That was in line with expectations.
With economic factors stabilizing, now is the perfect time to tackle your tax planning and ensure it doesn’t become a headache within the next few weeks!
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• Investments—including tax loss harvesting, loss carryover, investment interest expense deductions, and many more topics.
• Healthcare and Education—from the Child Tax Credit to Health Savings Accounts to 529 plans and more.
• Retirement Planning—Traditional and Roth IRAs, catch-up contributions, Required Minimum Distributions and other essential topics.
• Charitable Giving & Estate Planning—Gifting strategies, Donor-Advised Funds, private foundations and other ways to help yourself as you help others.
If you have $500,000 or more to invest and want to learn more, click on the link below:
Disclosure
2 ZIM may amend or rescind the free guide “Tax Planning in 2024: A User-Friendly Guide” for any reason and at ZIM’s discretion.
3 ZIM may amend or rescind the free guide “Tax Planning in 2024: A User-Friendly Guide” for any reason and at ZIM’s discretion.
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