10-Year Treasury Slips Below 4% on Trade Tensions and Bank Concerns
By Serafino Tobia, Director of Agency CMBS Trading and Portfolio
- The 10-year Treasury yield is currently 4%, 3 basis points lower this past week, with a range of 14 basis points (3.93% to 4.07%).
- 2-year Treasuries are at 3.46% this morning, 4 basis points lower list past week
The yield on 10-year Treasuries dropped to 3.93% at one point Friday morning in the overnight session, the lowest level since early April reflecting a classic risk-off trading out of stocks and into safer investments. Recall, a week ago, 10-year Treasury yields gapped lower by 7 basis points as the trade tensions with China became front and center news - including China’s announcement of export restrictions on rare earth minerals and President Trump moving tariffs on Chinese imports to 100% starting 11/1.
China trade tensions were not the only driver behind the improvement in bond yields and the broader risk-off sentiment. On Thursday, Zions Bank and Western Alliance reported large losses tied to commercial loan fraud. These disclosures, combined with escalating China trade friction and dovish commentary from Fed Chair Powell and other officials, contributed to the 10-year Treasury yield move below 4% before a modest rebound to the current level.
Last Week’s Economic Data
With the ongoing US government shutdown, the economic data remains sparse.
The September CPI inflation report that was due out last Wednesday (10/15) will be published this Friday (10/24). A week ago, Friday, the Bureau of Labor Statistics (BLS) announced that it will bring in staff to publish the September CPI index even if the government shutdown extends. CPI figures are required for the Social Security cost of living adjustments and of course the Fed will get to see this key inflation data too before the rate decision at the FOMC meeting and rate decision on October 29th.
Last week’s non-federal government data announcement last week included:
- Fed Beige Book - overall economic activity was stable to slightly down, with modest rises in wages and prices and uneven sector performance. The Beige Book is the Fed’s anecdotal economic activity report across the 12 Federal Reserve Districts.
- Philadelphia Fed Business Outlook - The index fell to -12.8 for October, down some to 36 points versus September’s print +23.2.
Fed Monetary Policy
The FOMC will start a 2-day meeting in 8 days and it’s expected that the Fed will reduce the overnight Fed Funds rate by another 0.25% at 2 PM on Wednesday October 29th.
The Fed is leaning forward into normalizing interest rates to address an underperforming labor market. While no employment report was published for September due to the government shutdown, the ADP employment report for September indicated a loss of -32k jobs. Recall, the jobs market has underperformed since May, evidenced by the weak non-farm payroll prints in July (+73k) and August (+22k) and downward revisions to job growth totaling -258k for June and May.
Keep in mind however, the Fed is also still concerned about inflation, sticky at around 3% with the potential to move higher driven by the government’s tariff policies. We will receive the delayed September CPI inflation report this Friday.
The overnight Fed Funds rate is 4.11% (target range 4.00%-4.25%). The yield curve implies a 51-basis point drop in the Fed Funds rate by year end (implied Fed Funds rate 3.59%). The yields imply the Fed Funds rate to be 2.87% by the end of 2026.
My Take on Longer Term Yields
10-year Treasuries yields likely stay in a range around 4% +/- 10 basis points reflecting a backdrop of a weakening labor market but counterbalanced by inflation remaining sticky around 3%.
Yields dropped to the lowest level since April (when the markets moved risk-off after President Trump’s April 2nd original liberation day announcements of country-specific tariffs). Lower yields last week were driven by a new round of trade tensions with China, concern about the health of the economy, the ongoing government shutdown, and a Federal Reserve that is expected to cut interest rates by another 50 basis points before year-end. Yields moved modestly lower again on Thursday and Friday as confidence in the regional banking system was questioned following fraud related loan loss disclosures by Zions Bank and Western Alliance.
Mortgage rates are attractive in the current market with 10-year Treasuries at 4% and mortgage spreads near the low-end of the recent range. If markets were to price-in a sustained 3% inflation rate over the next decade, fair value for 10-year Treasury yields would likely be closer to 4.5% (expected inflation plus spread for a real return and term risk).
Inflation as measured by the CPI increased by 0.4% in August (Core CPI came in at +0.3%). Year-over-year, August CPI printed at +2.9% (annual core CPI printed at 3.1%). There are also a number of factors that would drive inflation higher including the administration’s tariff policies. As discussed above, the delayed September CPI report will be released this Friday morning and will be closely wanted by market participants for further insight into inflation trends.
This Week’s Economic Data
With the federal government shutdown still in effect, we’ll have another week of limited economic data. Confirmed data releases this week include:
Today at 10 AM - Conference Board Leading Index
Friday at 8:30 AM - September CPI Inflation Index
Friday at 9:45 AM - S&P Global Manufacturing, Services and Composite Index
Friday at 10:00 AM - U Mich Consumer Sentiment and Consumer 1- and 5-year inflation expectations
The information provided in this article, including, without limitation, any opinions, predictions, forecasts, commentaries or suggestions, is for informational purposes only and should not be construed to be professional or personal investment, financial, legal, tax or other advice.