A Quick Look At Where Interest Rates May Be Headed

Bond yields rose this week following a stronger-than-expected September Jobs Report, which diminished the appeal of bonds and reduced expectations for larger rate cuts. Most forecasters now anticipate only a 25 basis point cut in November. It’s important to keep a close watch on both oil prices and longer-term bond yields, as these two have been moving in tandem for the past couple of years. The rise in oil prices is partly due to the ongoing conflict in the Middle East, but it’s also linked to China’s recent large-scale monetary easing aimed at reviving their economy. This stimulus has driven a surge in many commodities which has the potential to be inflationary.

The September Jobs Report, which as of late has seen revisions downward over time, came in stronger than expected. 254,000 jobs were added compared to the forecast of 150,000, which caught many economists by surprise. The unemployment rate dropped to 4.1% while wage inflation picked up. The combination of these movements signaled further inflation, as payrolls are the largest expense for most businesses. Although Wall Street has grown more optimistic about a potential soft landing, many remained concerned about inflation reaccelerating. Given the nation's substantial debt burden and significant cash outlays for environmental initiatives and AI investments, we don’t foresee long-term bond yields dropping much further. In fact, the trend suggests a higher 10-year Treasury yield over time. As such, we’re advising borrowers to seriously consider locking in interest rates now as they may not fall significantly in the future.

Here’s a simple framework we use to think about bond and mortgage rates:

1. Fed Dot Plot and Inflation: We start by looking at the Fed dot plot to assess the Fed's expectations for short-term interest rates and consider where inflation is headed. Assuming inflation returns to 2%, the Fed has indicated they aim for a real return of 50 basis points, which would imply a Fed Funds rate at around 2.75%.
2. 2-Year Treasury: Historically, there’s about a 50 basis point spread between the Fed Funds rate and the 2-year Treasury. This would suggest a 2-year Treasury yield at around 3.25%.
3. 10-Year Treasury: Typically, there’s a spread of about 150 to 175 basis points between the 2-year and 10-year Treasury. This would imply a 10-year Treasury yield in the range of 4.50% to 4.75%.?

Using this framework, and assuming no significant disruptions, it seems unlikely that long-term rates will drop much lower. This is why we believe now may be a good time for borrowers to lock in their rates, rather than waiting for further rate reductions. Visit www.insigniamortgage.com to learn more about our unique loan products and view the most up-to-date interest rates.?