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The Bull vs Bear Case for 10-Year Treasury Yield

The 10-year Treasury continues to be a lynchpin of longer-term lending, including CRE mortgages. But its near-term future is uncertain. What will happen depends on macroeconomic factors, investor sentiment, and White House actions, and there are two schools of thought.

The most fundamental issue is the term premium. That’s the amount of interest of a Treasury bond yield over and above the federal funds rate, set by the Federal Reserve, that investors want to see before buying.

“Recently it’s been rising quickly,” Rebecca Patterson, an economist and former chief investment strategist at Bridgewater Associates, wrote in The New York Times. That typically means investors expect long-term growth and higher future interest rates to control it.

But Patterson says that the trigger seems more about concern than optimism about the future, and much of that relates to President Donald Trump and his strategies. She argues what The Wall Street Journal has called the bear case for bonds.

Under the bear case, several factors stoking market fears could come to fruition and drive up inflation. That includes Trump’s call for 25% tariffs on Mexico and Canada that would raise prices in the U.S., mass deportation of immigrants leading to critical labor shortages (particularly in real estate construction), and tax cuts increasing deficits that will drive higher government borrowing and a greater supply of Treasurys that would push prices down and yields up even further.

Patterson points to the minutes from the December Fed meeting and expectations that there will be more inflation. The central bank would find it harder to cut rates. A growing number of folks on Wall Street think rates could end up increasing, making life and business more difficult.

Then there’s the bull case that the Journal also described. In that scenario, the 10-year yield is at 4.55%, although it almost reached 4.80% in mid-January. “It stands to reason that long-term Treasury rates shouldn’t drift too far above short-term rates,” the Journal wrote. “The biggest influence on 10-year yields is typically what investors expect short-term rates to average over the next 10 years, and the Fed is still in a period of cutting rates, not raising them.”

Except yesterday, the Fed kept rates where they were. To assume that there is still a period of cutting rates may be getting too far ahead. Also, the argument says the White House turmoil is a lack of clarity that will eventually come into focus. Goldman Sachs recently predicted that tariffs won’t hit the levels that Trump has currently signaled.

For CRE investors, the consideration is whether to wait and hope for better rates — the bull scenario — or to be the bear and either bow out of the market and make nothing or invest with known conditions now and, if things improve, refinance at the time.

Reprinted with permission from the Thursday, 30 January 2025 07:03:49 EST online edition of GlobeSt © 2025 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-256-2472 or reprints@alm.com.