Yields on 10-Year Treasuries Don’t Always React to the Fed
The Fed recently hiked rates by 25bps and that may mean nothing for longer duration treasuries
The 10-year Treasury yield is the benchmark for fixed-rate mortgages, so for most homebuyers it matters more than the Fed’s rate itself.
The Fed recently hiked rates by 25 bps. Does that mean everything else goes up by 25 bps? Not necessarily. Allow me to explain:
It is a historical fact that 10-year yields can rise, stay flat, or drop when the Fed hikes rates. Let’s look at all three scenarios from the recent past:
1. It moves up with the rate hike
On July 26, 2023, the Fed hiked rates by 25 bps. The 10-year yield was 3.86% on announcement day and ended up at 4.08% five trading days later (a 22 bps increase).
2. It stays flat, paying no attention to the rate hike
On November 2, 2022, the Fed hiked rates by 75 bps. The 10-year yield was 4.10% on announcement day and ended up at 4.12% five trading days later (only a 2 bps increase, quite meaningless). This was a huge hike, yet the long end went nowhere.
3. It drops, moving opposite to the hike
On June 15, 2022, the Fed hiked rates by 75 bps. The 10-year yield was 3.33% on announcement day and ended up at 3.09% five trading days later (a decrease of 24 bps).
So why is this?
Because the Fed sets the short end. The 10-year is a vote the market places on future growth, inflation, and the economy in general. The market, a.k.a. investors, demands real returns. If investors think inflation is coming to eat their yield, they demand a higher one. If they expect the economy to do poorly and stocks to underperform, they settle for lower yields, since something is better than nothing.
To monitor the 10-year yield and other relevant rates, go here: https://arsenal.finance/economy
Disclaimer: The information above provided by Arsenal.Finance is for educational and informational purposes only and should not be construed as investment, financial, or legal advice. I am not a financial advisor. All investments involve risk, and the past performance of a security or financial product does not guarantee future results or returns. Always conduct your own research or consult with a professional before making any financial decisions.