Why 10-Year Treasury Yields Are Rising Again

Long-term interest rates reversed their backslide a bit on Friday, as traders got a bit less gloomy about potential cracks in the banking system forcing the Federal Reserve to cut interest rates a bit more than planned. 

The yield on the benchmark 10-year U.S. Treasury rate, which helps drive borrowing costs on mortgages, climbed back above 4% on Friday. It had breached that mark on Thursday, when it closed at 3.97%, and had been sliding again earlier on Friday before closing above 4%. 

The declines last week followed concerns over the health of some banks’ loan portfolios, as troubles with a corporate borrower emerged at a couple of regional banks out West. Investors were already on their toes after JPMorgan Chase CEO Jamie Dimon warned about potential cockroaches earlier in the week.

Investors have been “driven by the perception that underneath strong economic numbers, there are crevasses of credit and valuation risks that are deepening and broadening,” Viktor Shvets, a strategist at Macquarie, wrote on Friday.

The Fed was already gearing up to cut rates later this month and in December, but a weaker economy could prompt more rate cuts in 2026, analysts say. That could provide a boost to job growth if it is indeed faltering, while also lowering the interest rates that borrowers pay on their bank loans and preventing more stress.

“The idea that signs of stress are beginning to emerge in specific sectors of the real economy is consistent with the Fed’s efforts to normalize policy rates,” Ian Lyngen, a strategist at BMO Capital Markets, wrote on Friday. 

The Fed has already cut short-term interest rates from its post-pandemic high of a range of 5.25% to 5%. After pausing for some months, it proceeded with cutting rates again last month and lowered rates to a range of 4% to 4.25%. Fed officials have penciled in a couple of more cuts this year.

Long-term rates, such as the 10-year yield or the 30-year mortgage rate, are influenced by a series of factors. However, the outlook for the Fed’s policy is one factor that pushes them up or down.

Investors don’t seem to be betting on overly aggressive Fed cuts, such as a jumbo 50 basis point cut at the Fed’s October meeting. The Fed tends to move rates in 25-basis-point increments, and futures market pricing suggests trades see a 99% chance of the Fed sticking to that strategy, according to the CME Group’s FedWatch tool.

“There will be continued talk of the potential for 50 basis point cuts, but we still remain solidly at 25 twice for the rest of the year,” Andrew Brenner, vice chairman at NatAlliance Securities, wrote in a note to clients. 

An inflation report next week will also be critical, as a higher-than-expected jump in prices could force the Fed to be a bit less aggressive in rate cuts.

Investors, meanwhile, seemed in a cheerier mood after Thursday’s slump in the stock market, which had hit regional banks particularly hard. Last week’s jitters revived memories of 2023, when Silicon Valley Bank’s collapse triggered worries over regional banks as a whole.

The KBW Nasdaq Regional Banking Index was up 1.7% on Friday, recovering some of its losses after it fell 6% on Thursday.

Regional bank CEOs who reported earnings on Friday, meanwhile, told analysts their portfolios remained broadly healthy.

“Credit quality is strong,” said Bill Rogers, the CEO of North Carolina-based Truist Financial (TFC), adding that the bank will remain “hypervigilant” over any signs of cracks. 

For its part, Truist’s stock was up 3.67% at Friday’s close.