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There’s one major economic indicator that investors, analysts, and central bankers are watching closely in 2025 — and it’s not GDP, inflation, or unemployment.
The 10-year Treasury yield shows what 10-year U.S. Treasury notes will pay over ten years, if bought today. Although the yield is typically a proxy for a number of economic factors, such as mortgage rates and investor sentiment, it’s poised to be a more important indicator than usual next year — even more so than the highly-watched interest rates maneuvered by the Federal Reserve.
“The yield on the 10-year note has a much more direct impact on the interest rates that businesses and households are likely to pay” than the benchmark federal funds rate, said Matt Colyar, economist at Moody’s Analytics.
“Therefore, the 10-year yield’s path in 2025 will determine the relief or pain that businesses and households will experience,” he added.
Treasury notes are debt obligations issued by the Department of Treasury. They are conventionally considered the ultimate “risk free” asset because they are backed by the “full faith and credit” of the U.S. government. When demand for Treasuries rises, so does their price, and yields subsequently fall.
Because they are a secure, long-term asset, investors flock to Treasury notes when their expectations for the economy are more pessimistic or volatile. A number of factors can change the trajectory of the yields, including expectations of stronger economic growth, higher inflation, rising national debt, geopolitical and economic uncertainty, or recession fears.
If inflation drops faster than expected next year, for example, demand for Treasury notes would rise and the 10-year yield would fall.
“Not only are inflation expectations built into bond yields, but this progress would also favor a more aggressive easing cycle from the Fed,” Colyar said. A softer labor market, or more targeted and less dramatic tariffs than those proposed by President-elect Donald Trump, could also drive yields lower.
On the other hand, fast-rising inflation, more aggressive tariffs, and wage growth acceleration driven by a robust labor market could push the 10-year yield higher. Policy uncertainty under the incoming Trump administration could have a comparable impact.
Trump has floated general tariffs of up to 20% on imported goods from all countries, as well as up to 60% on products from China. Goldman (GS+1.09%) economists have warned that such sweeping tariffs could briefly send inflation back up above 3%. Other potentially inflationary proposals, including those that could add to the already more than $36 trillion national debt, could also drive yields up.
“If policies in the coming year, perhaps deficit-financed tax cuts, scare investors, they may demand higher yields to purchase Treasuries,” Colyar said. Moody’s expects the 10-year yield to stabilize at around 4.3% next year, still above the long-term average of 4.25%.
In response to Fed forecasts of fewer rate cuts, stronger economic growth, and higher inflation expectations in 2025, the 10-year yield popped up more than three basis points, hovering around 4.5%.
The central bank indicated in its updated Summary of Economic Projections Wednesday that, given quarter-point cuts, it could carry out just two reductions of the federal funds rate in 2025. That’s about half of what it had previously expected.
Central bankers also raised their inflation expectations as year-end 2024 expectations have, in Powell’s words, “kind of fallen apart.” The Fed is now projecting headline inflation of 2.4%, a slight increase from 2.3% anticipated in September, and core inflation of 2.8%, up from 2.6%. The Fed also raised its 2024 GDP growth forecast to 2.5%.
The expectation for higher real GDP growth is “probably the primary driver of the increase in long-term interest rates,” said Jason Trennert, CEO of Strategas Research Partners. While higher GDP is a good thing, the fear of resurgent inflation is a negative driver of rising yields.
“I think there are reasons to fear another wave of inflation, at least historically,” he added.
The Federal Open Market Committee voted Wednesday to cut interest rates by another 25 basis points to 4.25%-4.50%, a two-year low. Despite the Fed slashing the federal funds rate by 100 basis points since September, the 10-year yield has risen 80 basis points in that same time.
“With today’s action, we have lowered our policy rate by a full percentage point from its peak and our policy stance is now significantly less restrictive,” Powell said in a post-meeting press conference Wednesday. “We can therefore be more cautious as we consider further adjustments to our policy rate.”
For 2025, the Fed is expecting both core and headline inflation of its preferred metric — the personal consumption expenditures index — to tick down only slightly to 2.5%.
The 10-year yield also provides insight into the mortgage market. Mortgage-backed securities tend to move with the 10-year yield because they often draw the same investors.
Following the Fed’s jumbo, 50-basis-point cut in September, mortgage rates have risen in tandem with the yield. The 30-year loan has swung from a recent low of around 6% in September, in anticipation of the Fed’s first interest rate cut, back toward 7% in the weeks since.
“Expectations that the Fed will cut rates less than had been anticipated have been priced into the market in the form of higher 10-year Treasury and higher mortgage rates in recent weeks,” Mortgage Bankers Association chief economist Mike Fratantoni said.
In its 2025 housing market forecast, Realtor.com (NWSA+1.59%) said it expects average mortgage rates to remain elevated through next year, ticking down to 6.2% by the end of 2025. The Mortgage Bankers Association puts that closer to a 6.5% average over the coming years with “significant volatility,” Fratantoni said.
“Mortgage rates are reacting more to future expectations rather than current Fed actions,” said Bright MLS chief economist Lisa Sturtevant. “As the Fed projections showed, inflation is not going to come down as fast as had been expected earlier this year. Furthermore, the labor market continues to be resilient. As a result, mortgage rates could remain higher for longer through 2025.”