Decoding the (Almost) 5% 10-Year Treasury Yield
The yield on the benchmark 10-year U.S. Treasury note touched 5% for the first time in 16 years last week, spurring debate about whether it has peaked or just taken another step in its long and disruptive climb. Treasury yields play a critical role in determining borrowing costs across the economy.
Their nearly two-year surge has driven 30-year mortgage rates close to 8%, weighed on stocks and stirred anxieties that the surprisingly resilient economy could finally fall into a recession. Here is a look at how yields got here and their possible paths forward: The Fed sets the tone Yields on Treasurys largely reflect investors’ expectations for what short-term interest rates set by the Federal Reserve will average over the life of a bond. As a result, the 10-year yield never quite got all the way down to zero, where short-term rates effectively sat during most of 2020 and 2021.
And they started climbing in 2022 before the Fed ever raised rates. Since late last year, the 10-year yield has been sitting below the federal-funds rate, reflecting bets that the Fed will cut rates in the future. But the overnight borrowing rate still establishes its rough parameters.
The inverted yield curve and the forces against it For much of 2022 and 2023, longer-term Treasury yields were well below short-term ones. That anomaly, known as an inverted yield curve, is infamous for a reason. To accept lower yields on longer-term Treasurys, investors need to have a strong conviction that interest rates will fall in the future, most likely because of a recession.
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