Long-term yields matter to the economy. So how to get the 10-year yield down? Not with rate cuts, obviously. That flopped and had the opposite effect. But with a three-pronged strategy.
By Wolf Richter for WOLF STREET.
The 10-year Treasury yield dropped by 8 basis points on Friday, to 4.43%, perhaps inspired by iffy feelings elsewhere as stocks careened lower and investors sought safety.
Since January 10, the 10-year yield has now given up 34 basis points of that 114-basis-point spike that it had experienced from mid-September 2024, just before the Fed’s first cut, through January 10, 2025. Over this period of surging long-term yields, the Fed had cut its short-term policy rates by 100 basis points.
The Effective Federal Funds Rate (EFFR), which the Fed targets with its policy rates, has remained at 4.33% since the December rate cut, down by 100 basis points from the pre-cut levels (blue).
One of the reasons for this massive disconnect was the market’s assumption that the Fed, amid its rate cuts and rate-cut talk, would be lax about inflation, which just at the nick of time had started to re-accelerate. And further rate cuts could provide additional fuel for it. Rising inflation and a lax Fed spook the long-term fixed-income market.
Long-term yields really matter to the economy. They reflect the borrowing costs for businesses and households. There is some debt with floating rates, but the majority of the debt has fixed rates that track 10-year Treasury yields, and higher 10-year yields would increase actual borrowing costs for new debt in the economy and tighten financial conditions and eventually slow the economy.
These rate cuts, and the formerly-projected future rate cuts, in light of the inflation scenario developing over the past few months, had the effect of spooking investors who wanted to be compensated more for those higher inflation risks over those 10 years, which pushed up long-term yields.
So how to get the 10-year yield to go down?
Not with rate cuts, obviously. That flopped and had the opposite effect. But with a three-pronged strategy:
- The Fed gets more hawkish about inflation and puts further rate cuts on ice.
- The Treasury Department minimizes the supply of long-term Treasury securities, by shifting issuance to short-term securities, which it has been doing for over a year; and by deficit reduction, which is new.
- The Fed and Treasury Department both talk down the 10-year Treasury yield.
So the Fed got more concerned about inflation at the December meeting, when it cut one more time, but projected only two cuts in 2025, and saw higher inflation and higher “longer run” rates. At the January meeting when it didn’t cut, the Fed pivoted to wait-and-see and put further cuts on ice.
Then on February 6, Treasury Secretary Scott Bessent came out and said in an interview that “The president wants lower rates,” but that “he and I are focused on the 10-year Treasury and what is the yield of that.”
So lower long-term rates. And how do you get long-term rates down? Get inflation down and keep it down. And that’s the Fed’s job. And rate cuts won’t do that job. The Fed cannot be lax about inflation, that became abundantly clear, because a lax Fed in an inflationary environment would drive up long-term yields.
Short-term yields stayed put.
Short-term yields essentially haven’t budged since early December when they had already fully priced in the rate cut at the time.
The six-month yield no longer prices in any rate cuts in its window through mid-2025 before it matures, hovering right around the EFFR.
The yield curve flattened.
With the Fed having put rate cuts on ice, short-term yields stayed put at around the EFFR, while long-term yields came down some. As a result, the yield curve flattened some.
The chart below shows the yield curve of Treasury yields across the maturity spectrum, from 1 month to 30 years, on three key dates:
- Red: January 10, 2025, just before the Fed pivoted to wait-and-see.
- Gold: Friday, February 21, 2025.
- Blue: September 16, 2024, just before the Fed’s rate cuts started.
This yield curve has a dip at the one-year yield, with the 6-month yield being higher than yields in the range of 1-5 years.
But mortgage rates remain close to 7%.
From the initial rate cut in September through mid-January, just before the Fed pivoted to wait-and-see, the average 30-year fixed mortgage rate had risen by 96 basis points, to 7.04%, according to Freddie Mac’s weekly measure, while the Fed had cut by 100 basis points.
Mortgage rates have since given up only 19 basis points of this 96-basis point surge, and at 6.85% are at the upper end of the 6-7% range in which they have been since September 2022.
Over the three decades between 1972 and 2002, 7% was the lower edge of the range, and for most of that time, rates were above 8%.
Enjoy reading WOLF STREET and want to support it? You can donate. I appreciate it immensely. Click on the mug to find out how:
Savers can’t catch a break.Most yields now on savings& CDs are below 4%.
It’s obvious inflation isn’t dead,but a 5% savings rate is.
T-bills are still over 4%. Many money-market funds are also over 4%.
Banks are here to rip you off if you let them.
Today’s problems are the results of too much liquidity from irresponsible unnecessary fiscal spending by Schumer, Pelosi, Biden
(approx. 7 $trillion from 2021 to 2024) and irresponsible monetary policy during pLandemic. Probably all well devised by CCP.
So congrats to them on their success. But are they truly prepared for All the ramifications?
LOL, is your memory so bad or so tainted that you forgot the other half? In the 4 years from Jan 2017 through Dec 2020 (Trump 1), the US debt exploded by $7.7 trillion, or by 38%, from $19.9 trillion to $27.6 trillion.
Tim,
There might be some hope for the working class give up the us versus them in who is less responsible. Neither side really cares about anything other than staying in power and dividing what could be, with perspective, a unified class struggle to something better. This is not some abstract concept but a simple recognition of doing the right things in a society(health care, education, secure retirement, food security, shelter and so on). Not exactly like we don’t have the money if the correct priorities are choosen.
1 year CDs are 4% at my local credit union, down from 5% last year. So I’m breaking even with inflation.
Have you looked into bitcoin?
/s
The DFIs could continue to lend even if the nonbank public ceased to save altogether. I.e., savers never transfer their savings outside the commercial banking system unless they hoard currency or convert to other national currencies. The elimination of Reg. Q ceilings was a pyrrhic victory. I.e., the NBFIs are the DFI’s customers. An increase in bank CDs adds nothing to GDP.
Retail savers who don’t care are getting sub 4% rates.
It’s trivial to search for over 4% for FDIC insured savings accounts CD & savings accounts from banks you have heard of and those you haven’t. Like on doctor of credit.
Add on top of that MMAs from all the brokerages, including the ironic communism for capitalists Vanguard, it’s trivial to get MMAs based on treasury products or just buy t bills from Treasury direct.
Heck, I have check writing privs and unlimited ATM access to handle my checking needs on fidelity through its MMA based on tbills.
A lot of retail savers don’t do it right.
I too miss 5% risk-free yields, but you can still get 3.7% from Capital One’s liquid savings account, and SGOV is still 4.33% which I use as my “cash” account with my brokerage.
My cheapskate credit union stopped paying anything on their savings accounts a few months ago, so I’m keeping as little in there as possible (except a 4.5% 6mo CD I took out last Nov – suckers!)
Chasing yield on CDs and bank accounts isn’t worth it. Do yourself a favor – Treasurydirect.gov. Easily roll Tbills and move money to your checking account in a couple days if you need it. Anyone sitting on six or seven figures of cash should stop goofing around with banks and sleep quite a bit better at night.
Wolf – great chartsbas always – would you mind including the 20Y long bond on the UST yield curve chart?
Except for low balance checking accounts, I quit banks and moved to T-bills two years ago and have not looked back. I buy them through my broker Schwab (I am not advertising Schwab, they have their pluses and minuses, but I eventually learned how their system works to my advantage, so they are okay). T-bills pay the highest rate on 3 month governments, 4.31%. Plus you don’t pay state tax on interest (a big deal if you live in a high tax state). The highest 3 month CDs on Schwab pay 4.35%, but you pay state tax on the interest. There are some non-broker CDs from boutique banks that pay higher, but you have to spend a fair amount of time searching for them, and don’t forget you pay state tax on the interest and an early withdrawal penalty if you need the money fast.
I like to stay liquid, Treasury Direct will not let you sell through them (you have to transfer the funds to a broker), and CDs always have early withdrawal penalties, some draconian. Banks are not your friends. Finally, ACH-ing money to or from my banks to Schwab is accomplished overnight. Just meet the cut-off times when ordering.
BTW, to ShortTLT, SGOV has a .09% expense ratio, which is pretty low, but if you have a lot of bucks, it makes more sense to buy 1 to 3 month T-bills. They are just as liquid, only a little more complicated to deal with. You also have to buy T-bills in $1000 increments at brokers. As a parking space for low balances, as you say, SGOV is probably okay.
if you’re getting below 4%, you’re not trying hard. raisin is a platform that has plenty of savings accounts above 4%, and just from a google search, i see that openbank, a santander affiliate, has 4.75%.
Buy individual muni bonds that are investment grade with yields that are ~4.5% tax free, which is the equivalent to over 6% taxable depending upon your individual federal tax rate. And most have call protection until 2033.
Also they are quite liquid and you can sell them at anytime.
Franz and Bill, you should provide us with the terms (1 month, three month, 1 year, etc.).
The CAGR of the money supply (m2) has been 7%/year long term. So unless your investments earn that after tax you are losing real value.
M2 is worthless. The accounts it includes and excludes make it useless. It’s completely outdated. Base your decision on a screwed up worthless metric at your own risk.
What are the proper metrics to use for money supply / monetary debasement?
It’s not money supply that is the problem, it’s artificial money supply created by central banks that’s the problem. So we watch the Fed’s balance sheet for that.
A growing economy with profitable businesses naturally creates “money.” And destroys “money” when things turn really bad. That’s part of an economy. And that’s not the problem.
I’m not too surprised 10Y+ yields took a break from rising – they needed to. However I don’t see how they can stay this low:
1. Short term yields aren’t going lower anytime soon, and with the YC this flat, there’s barely any term premium. Eventually bond investors will want more compensation for duration.
2. Bessent is looking to normalize Treasury issuance, which (as I understand it) means fewer bills and more coupons. More supply = higher yields.
No problem though, good opportunity to start buying some TLT puts again.
Bessent was critical of Janet for not issuing longer dated treasuries before getting the job, but his most recent statements are that they won’t issue on the longer end for a while. I thought the same as you until his tune has now changed. Funny how being a critic vs having to actually make the decisions changed him.
The Fed hinted at stopping QT soon. Summer probably.
They are going to continue to roll off MBS and probably start BUYING Tbills again to maintain relative balance sheet size. The Fed could potentially buy $200-300B of Tbills annually, and it won’t be QE.
If the deficit is reduced by 50% and the Treasury shifts duration to the 5-10Y range, and the Fed Hoovers up all the Tbills more or less, everyone else will be forced to go out on the curve. Long rates will DROP in this case. A deficit of $1T with the Fed buying up to 30% of that doesn’t leave much for everyone else. Global demand for UST is always strong.
“The Fed hinted at stopping QT soon. Summer probably.”
Not quite. They hinted at “slowing or pausing” QT if the coming debt ceiling fight starts messing with the reserves, which it can do.
Wolf, is pausing QT still a desirable outcome if the debt ceiling fight does mess with the reserves? In your opinion, how long would too long be for a pause? In my uninformed view, slowing the pace of QT makes sense on its face as opposed to a pause.
Withdrawing liquidity is risky and can be messy. No one has ever withdrawn that much liquidity. So there is no playbook. There is now close to $800 billion in the government’s checking account (TGA) at the Fed that is going to get drawn down during the debt ceiling, to maybe near nothing, and that’s not a problem. The problem the Fed pointed at is when the TGA is down all the way, and the debt ceiling gets lifted, then the government has to go on a borrowing binge to refill the TGA. SO cash leaves the banking system to buy T-bills from the government, and reserves (cash that banks put on deposit at the Fed) might drop sharply. So at that refilling stage is when liquidity shifts from reserves (draws them down quickly) via government sales of T-bills to the TGA. It’s the refilling stage after the debt ceiling gets lifted – that potentially sudden and massive drawdown of reserves – that the Fed is worried about. At the end of the last debt ceiling fight, ON RRPs were suddenly drawn down because of the shift (cash shifted from money market funds to the TGA), and that was fine, but now ON RRPs are nearly gone, and so the refilling of the TGA might come out of reserves in an unpredictable manner. That’s what the Fed is worried about.
For example, if reserves plunge by $500 billion in a month, that’s a lot. That’s on top of the drawdown from QT. I don’t know if that would cause a problem, but I can see that they’re worried it might cause a problem. The way to continue QT for as long as possible is to avoid causing a problem – that’s what the Fed speakers said multiple times over the past 12 months, including Logan, and I agree with that. If something blows up, QT ends, and that would be too bad. So I’m on board with trying to avoid a blowup in order to continue QT for as long as possible.
I know that doesn’t sit well with some people here who want to blow everything up now, especially the banking system, I mean, rip off the Band-Aid and get it over with, but obviously, that would start all the shenanigans all over again. The trick is not blow anything up while doing QT.
Super illustrative. Thanks Wolf. So a strategic pause around the timing of debt ceiling discussions wouldn’t be the end of the world. MBS would roll off in the background and an extra ~$40B of liquidity stays in the system. Is this correct?
I’m basing $40B off of your wonderful Feb 6, 2025 article titled “Fed Balance Sheet QT: -$42 Billion in January.”
Tlt puts
Don’t underestimate Trump and economic health could be we get lower 10 year by higher FFR slowing economy
Yeah, rates should head higher in April.
Can we escape retribution for over a decade of excessive monetary stimulus? Excessive inflation (and higher-for-longer rates) and/or excessive unemployment must surely follow, after the “Bernanke” decade. (Probably both — though sequencing will depend on our befuddled central bankers and the gullibility and fears of bond market participants.)
The world thirsts for an honest, reliable and brave monetary authority. Anyone seen one?
Except neither excessive inflation nor unemployment has followed. I don’t like higher prices any more than anyone else, but 4% is nothing in the face of the massive stimulus we had.
“Higher for longer rates” have just (partially) reverted to the historical mean.
Frankly the job this Fed has done so far is pretty remarkable. Nobody is bitching about the massive recession we didn’t have.
I wouldn’t give the fed that much credit. They failed at their job controlling inflation and still havent reached their target. I see first hand how the cost of living is destorying poor communities each day.
Let’s not forget that they broke the RE market with ZIRP. As Wolf has pointed out, there is not really a shortage of housing – things didn’t suddenly change when covid hit. But there is a large imbalance of homes and multifamilies that are reasonably affordable for the people that would like to live in them or rent them out affordably. And the Fed + stimulus broke that.
DRG,
I somewhat agree with you.
The FED are geniuses in preventing a housing crash like 2007. They gave every homeowner a 3% escape hatch back then which prevented massive selling before they drastically increased rates.
They prevented a multiply predicted recession during COVID.
My 2 criticisms of the FED are:
1) They are too slow in becoming conservative. They react years after they should with raising rates slowly (and panic when inflation is out of control.) and turn on a dime when lowering rates or implementing QE. People think the Fed will bail them out of reckless decisions. The US government is worse with extending COVID handouts and forbearance too long after the crisis had ended which caused inflation.
2) Why in the heck was the Fed buying MBS when the housing market was already bubbling?
I am speaking by looking in the rear view mirror but I thought this late 2021 when the Covid vaccines were fully available.
BobE-
Re: your comment “The FED are geniuses in preventing a housing crash like 2007.”
I wonder if you meant to say “postponing,” rather than “preventing?” Postponement is transitory, but prevention is forever…
Your comments on timing and over-reach are right on, though.
They aren’t bitching about the recession, for now, but plenty are bitching about inflation, high wealth concentration, speculative excess, and capital favoritism. We are facing a deep socital recession, which is much worse than any cyclical economic recession.
Bobber,
None of this is new as has been moving in this direction since 1970s. It is just the will and sacrifice needed to confront it is less appealing than the table scraps provided to keep everyone appeased. Fairly interesting to watch it unfold. Clearly a shift is occuring, from what I can tell among the younger generations but interesting to see how that holds up and what influence it has long term.
“The way to crush the bourgeoisie is to grind them down between the millstones of taxation and inflation.” — Vladimir Ilyich Lenin
I think our “bourgeoisie” are doing fine, our proletariat, however, are the ones being ground down.
4.5 trillion in tax cuts will increase the deficit and require higher treasury yields and cause higher mortgage rates.
All,
Now available from TreasuryDirect:
six-week T-Bills.
Is this an effort to skooch down
short term funding cost by attracting
more “warm” money?
J.
————————————————
I’d prefer something shorter than
4-week. Especially if the yield curve
is this flat. How abut a one-hour
T-Bill, for that really hot money?
Lowering the 10-year treasury yield, without lowering inflation? Or lowering the mortages rates, without lowering inflation?
The fed could always restart QE. If the Fed buys up 10-year treasuries and MBS, and rates are likely to fall, no?
Or just pause QT. QE is too much and leads to increased home prices.
The fed and other central banks can only manipulate long rates for the short term. As a suggestion for others, look at other treasuries around the world and watch what they are doing with relation to the 10 year US treasury recently. They are magically falling temporarily except Japan who currently has a major inflation problem that is getting worse and has a 10 year treasury that has ripped to the upside since September and it will go higher from here with their recent nasty inflation reports that keep getting worse.
Watch what happens with just 1 more red hot US inflation report next month. Just 1 more. You are going to see a massive uturn in the 10 year US treasury once again with hot inflation.
Future inflation will dictate where the 10 year goes. If inflation gets unanchored again……. Trump, the Fed, and everyone else can talk as much BS as they want. But talk is cheap. More Hot inflation month over month and year over year will rocket the 10 year higher, guaranteed. And in time, the 10 year getting high enough will eventually break the back of both the stock market and the real estate market along with the credit market. My prediction is, its coming. The BS “transitory” inflation wheel can only get spun so many times before things start to break because of inflation.
” If the Fed buys up 10-year treasuries and MBS, and rates are likely to fall, no?”
Inflation would explode.
Isn’t that the point of “interest rate repression”?
Inflation and nominal GDP explode, but bond yields do not, so “debt to GDP” goes back down to the “good” range while the bondholders get wiped of their real value?
Raise you’re hand if you had not already expected/desired the content of this article 6-12 months ago.
As usual, the FED is at least a year behind the rest of us. And I don’t believe it is due to incompetence, do you?
Hmmmmm
HUH? Haven’t read my inflation articles here??? A year ago, the Fed’s rates were still at 5.25-5.5%. And it was still in wait-and-see mode. But then inflation cooled a lot over last spring and summer and got close to the Fed’s 2% target in June, with the PCE price index at 2.1%, and core at 2.6%, while Fed rates were still 5.25-5.5%. That was a historically high positive real EFFR. So it made sense to cut, given how low inflation was at the time, and the trend it showed. But then inflation started accelerating in recent months. So it makes sense to wait and see. PCE inflation is now at 2.6% and core at 2.8% and the Fed’s rates are at 4.25-4.5%. If inflation heats up a lot, the Fed can hike again. If it cools back toward 2%, the Fed could cut.
Yeah, after Americans rediscovered what inflation meant….and HATED it, the Fed has been pretty much driven by inflation directions.
So goes inflation, so goes the Fed.
Although I don’t see a flattening of the yield curves as much confidence in the Fed credibility as the bond market being uncertain on the economy. We’ll see if it inverts…although that indicator is not always right either.
‘Over the three decades between 1972 and 2002, 7% was the lower edge of the range, and for most of that time, rates were above 8%’
Maybe explains most of the ‘odd’ stickiness of long rates: having gone through huge artificial manipulations to reduce rates, the market is returning to normal, and normal is not a three or four or five percent mortgage.
It’s easy to manipulate short rates because the risk is short. There is sometimes an ad on WS from a Canadian mortgage lender offering 2.9 %. I clicked on it: it’s for either 3 months or 6, forget which. A teaser rate. The 30 year offered in US is a different commitment.
New homes for sale near me in Texas (starter homes) are offering 4.99% – 5.99% teaser mortgage rates (2 years), then up to ~7% for the balance of the term.
Most likely the builder is just ‘buying down the rate’, kicking in the difference between market rate and the teaser rate. This is common.
Of course he could theoretically carry the mortgage himself, which is uncommon.
I am sure what the direction here is. 7% mortgage rates are here to stay. We are currently in the buying season.
Repricing has occurred since 2022 for homes. Food and energy have been most volatile in this period. Unless if congress can pass budget proposal, there is where we are at. The new treasury secretary issues more short term bills.
The system was destroyed further in 2021 when Yellen refused to change the way to pay our debt. If a republican house didn’t occur in 2022, we may as well would have said goodbye to America.
Yes the growth in debt was brought under control after 2022.