By Serafino Tobia, Director of Agency CMBS Trading and Portfolio
10-year Treasuries Trading Recap
The 10-year Treasury yield is currently 4.08% (10/29 NY closing level), some 7 basis points lower since the beginning of October, but 15 basis points off the low end of the range for the month (3.93% - 4.17%).
The 10-year yield dropped to the low-end of the range (3.93%) 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 November 1st. Sub-4% yields and risk-off sentiment were also driven by concern over regional banks with Zions Bank and Western Alliance reporting large losses tied to commercial loan fraud.
Last Friday morning (10/24), Treasuries gapped lower by about 5 basis points following the better-than-expected CPI report, but the rally quickly faded. The CPI data did little to shift the broader inflation narrative of inflation sticky around 3% and the likely further inflation pressure from tariffs as they filter through the supply chains and eventually get reflected in consumer prices.
10-year yields moved back to above 4% this past week with:
- Treasury Secretary Bessent’s progress in talks with China’s trade negotiators and
- The Fed’s rate decision on Wednesday was accompanied by a cautious FOMC statement about expecting any further rate cut at the next FOMC meeting on December 10th.
Essentially yields reversed the risk-off bond rally which had pushed yields down to 3.93%. Expect a grandiose trade deal announcement after Thursday’s Trump-Xi meeting in South Korea (10/30)– this will likely put some extra pressure on rates.
Last Week’s Economic Data
With the ongoing US government shutdown since the beginning of October, we are not seeing the economic data that we would typically receive from the Census Bureau and the Bureau of Labor Statistics (other than the CPI inflation data last Friday, 10/24).
- CPI Inflation – Headline CPI printed at +0.3% (0.31% unrounded) for the month of September, one-tenth below the forecast and the August print (0.4%). Core CPI (without the more volatile food and energy prices) printed at just +0.2% (0.23% unrounded) for September versus 0.3% expected and the previous month. Annual CPI inflation on both a headline and core basis printed at +3% versus 3.1% expected.
Last week’s non-federal government data announcement included:
- Philadelphia Fed Non-Manufacturing Index - The Philly region non-manufacturing survey was sharply lower -22.2 for October, versus -12.3 in September.
- Kansas City Fed Manufacturing Activity - The October survey of manufacturers in this region printed at 6 versus 4 the previous month. The Kansas City Fed Services Activity Index printed -5, an improvement versus September’s -9 print.
- S&P Global Purchasing Managers’ Index (PMI) – The Composite PMI for October printed higher at 54 versus 53.9 in September. Manufacturing PMI printed slightly higher at 52.2 and Services PMI printed at 55.2, indicating continued expansion.
- University of Michigan Consumer Sentiment - Consumer sentiment printed at 53.6 versus 55 last month. The survey indicates that consumer inflation expectations over the next year are 4.6% (same as last month). Over the next 5 years, consumers are expecting inflation at 3.9% up from 3.7% as of last month.
Fed Monetary Policy
On Wednesday (10/29), the Federal Reserve cut the Fed Funds rate by 25 basis points, bringing Fed Funds to 3.87% (target range 3.75%-4.00%). The decision had Fed governor Miram, President Trump’s recent appointee, dissenting in favor of a 0.50% rate cut and Kansas Fed President Schmid dissenting in favor of holding rates steady, no change.
During the post-rate decision press conference, Fed Chairman Powell expressed concern that the labor market may worsen over the next few months, we will need to see the data. Powell commented that it’s likely that tariffs are already adding about half of one percent to the inflation rate which would put core inflation at around 2.4%. That’s not too far from the Fed’s 2% target but clearly above target and may well mean that the Fed Funds rate is close to neutral. In other words, a further rate cut at the next FOMC meeting in December is far from a sure thing.
Fed Chairman Powell also acknowledged the lack of data due to the government shutdown. No employment report was published for September (originally due Friday October 3rd). We did receive an ADP employment report for September which 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.
It's also notable that the Fed announced that quantitative tightening (QT) would end December 1 about a month sooner than expected.
Meanwhile, as implied by the shape of the yield curve, the bond market is still leaning towards a rate cut at the December meeting but not fully. The yield curve implies a 0.17% drop in the Fed Funds rate by year-end (essentially a 68% probability of another rate cut on December 10th). The yield curve implies the Fed Funds rate to be 3.04% by the end of 2026 (as opposed to 2.92% before the Fed rate decision on Wednesday).
My Take on Longer Term Yields
10-year Treasury yields likely remain range-bound near 4%. Longer-duration bonds are a discounting mechanism, pricing in future inflation expectations against a backdrop of a softening labor market. The recent dip below 4% was driven by trade tensions with China and concerns over the economic impact of the ongoing government shutdown. However, with signs that US-China trade restrictions will be scaled back, the risk-off trade into bonds will likely fade. Also, with current inflation still around 3% and upward pressure on inflation likely from the pass-through of tariffs, further meaningful improvement in yields seems unlikely—unless new data points to a weaker economic outlook or a moderation in underlying inflation.
Mortgage rates are attractive in the current market with 10-year Treasuries at near 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).
About Serafino:
Serafino is Greystone’s director of trading in Agency CMBS (Fannie Mae DUS) and GNMA/FHA securities, interest rate caps and also directs Greystone’s proprietary portfolio investments in these types of securities, FHA-insured mortgages, and tax-exempt municipal bonds. Mr. Tobia previously traded bonds and muni derivatives at Lehman Brothers and at other NY banks/securities firms. Serafino holds a B.A. in Economics from Brandeis University and an M.B.A. in Finance from NYU’s Stern School of Business.
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.