Interest Rates Outlook: Rates Should Be Peaking Soon
The 10-year Treasury’s yield touched 5% this week for the first time in 16 years, but it should be near a peak. Long rates have been rising as the economy has posted better-than-expected results, with third-quarter GDP growth expected to come in strong when it’s reported later this week. But rates should eventually ease as more evidence accumulates of an economic slowdown going forward. The 10-year note’s yield will likely stay in the 4% to 5% range, however, as the slowdown should be only moderate.
The Federal Reserve will likely leave its benchmark short-term rate alone at its next policy meeting on November 1 and is likely finished raising rates for now. The Fed will likely consider the recent rise in long-term rates to have created an additional slowing effect on the economy, and so will not feel the need to add to it with another short-term rate increase. But the Fed is not likely to cut rates until the second half of 2024 since it wants to make sure inflationary pressures have ceased. Chair Powell has repeatedly emphasized that it would be a mistake to cut rates too soon and risk letting inflation rebound. Also, he has indicated that the long-run “neutral” policy rate (the level consistent with stable inflation) may be higher than previously expected, which would mean fewer Fed rate cuts over the long run.
Other short-term interest rates have risen along with the federal funds rate. For investors, rates on super-safe money market funds have risen above 5%. Rates for borrowers have ticked up, as well. Rates on home equity lines of credit are typically connected to the prime rate, which in turn moves with the federal funds rate. Rates on short-term consumer loans such as auto notes have also been affected. Financing a new vehicle now costs around 7.4% for a six-year loan, and 11.4% for a used vehicle.
Mortgage rates will stay elevated until there is more progress in the inflation fight. 30-year fixed-rate loans are averaging 7.7%, a new 23-year high, while 15-year fixed-rate loans are around 7.0%. Mortgage rates are about 2.5 percentage points higher than the 10-year Treasury yield because lenders’ cost of funds has risen more than long rates, which has squeezed their profit margins.
The upward pressure on long rates has also affected corporate bond rates. Higher-rated bonds’ yields are ticking up a bit on expectations of a better economy and stronger inflation, while lower-rated bonds’ yields have risen more on concerns about the financial health of borrowers with heavy debt loads. AAA-rated bonds are now yielding 5.6%. BBB bonds are averaging 6.7%, while CCC-rated bonds’ yields are at 15.1%.
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