I expect lots of excited speculation about whether or not the Federal Reserve will raise interest rates when it meets on Wednesday, July 29.
In the last week the speculation has moved strongly in the direction of a rate increase. The odds of a 25 basis point increase have climbed to 34.2% on the CME FedWatch Tool as of Friday, July 24, from just 12.8% week ago. That still says a rate increase is less likely than no change from the Fed. But that’s a huge shift in sentiment in the Fed Funds Futures market tracked by the CME FedWatch.
However…
The bond market may have already made its decision on higher rates. And rather than leading the bond market, the fed may be just following along with what bond buyers have already decided.
Last week the yield on the benchmark 10-year Treasury bond, jumped to 4.7%, up from less than 4% before the start of the war in Iran in late February. It was 4.6% on the day Donald Trump returned to the White House in January 2025.
The 10-year yield sets borrowing costs across debt markets from corporate bonds to mortgage loans.
The impact of 10-year higher yields is apparent in the housing market. The interest rate on tevaverage 30-year fixed-rate mortgage, the most common home loan in the United States, is now 6.58%, Freddie Mac said Thursday. Mortgage rates had fallen below 6 percent in the week before the first U.S.-Israeli strikes on Iran in late February.
“This latest leg up in rates is going to push sales down unless it’s quickly reversed,” Nancy Vanden Houten, lead U.S. economist at Oxford Economics, told the New York Times. “And it comes at a time when households are confronting other increased costs for energy and food due to the effects of the war.”
The reasons for the rise in 10-year yields are complex:
Some of the increase can be attributed to higher inflation expectations amid soaring oil prices.
Some is due to the build-out of artificial intelligence infrastructure with its demand for billions in capital and the expectations of faster economic growth.
And some, a big “some,” is a result of investors’ worries about unsustainable fiscal spending by governments around the world.
In the UK, yields on 10-year gilts–the equivalent to U.S. Treasuries-—have risen 0.9 percentage points to over 5% since the war started, alongside concerns over the fiscal plans of the new prime minister, Andy Burnham. In Japan, yields on 30-year government bonds have risen 0.7 percentage points, to 2.8%, over the same period, as the government has rolled out big spending plans. The U.S. government has nearly $40 trillion in debt outstanding, more than double the amount 10 years ago.
“All bond yields are rising, and it is for some of the same reasons,” Subadra Rajappa, an interest rate strategist at Société Générale, told the New York Times. “It is about domestic debt and deficits. It’s happening globally.”
Scott Bessent, the Treasury secretary, has pointed to the 10-year bond as a “barometer” of his success in improving affordability. “Lower Treasury borrowing costs mean lower corporate borrowing costs, lower mortgage rates and lower car payments–which all translates to greater affordability for all Americans,” he said in a speech in November.
And higher Treasury yields mean…
