On September 18^th, the Federal Reserve announced they were cutting the overnight rate by 50bps or ½ of 1%. Many market actors expected a broad decline in all interest rates. As we pointed out back in April (Treasury Yields & the Fed) Fed cuts do not impact the entire yield curve equally.

Since the rate cuts on September 18^th, the yield on the 10-year Treasury increased about 50bps and the yield on the average 30-year mortgage followed suit.

As we said before, the Fed determines short-term rates but the market sets longer-term rates. There are several forces in the Treasury market putting upward pressure on long-term rates.

For clues about the future direction of long-term rates, we’re watching these variables:

• Federal budget: The deficit raises the risk for longer-term bonds and contributes to higher yields.
• Long-term inflation expectations: higher inflation expectations means higher long-term rates.
• Treasury demand: Yields will stay high unless we see more investors buying Treasuries.

In the meantime, we continue to believe that rates will be higher for longer and we continue to emphasize high quality equities and lower-duration fixed income.
 

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