Monthly Interest Rate Update
Rising geopolitical tensions, higher energy prices, stubborn inflation and weakening job growth are clouding the outlook for interest rates. While Treasury yields have reacted to recent strikes on Iran and rising oil prices, long-term rates remain stuck in a narrow range as markets weigh inflation risks against a slowing labor market.
Markets are being buffeted by war in the Middle East, higher energy prices, a fresh round of tariff uncertainty, the nomination of a new Federal Reserve Chair, a labor market that can’t find its footing and stubbornly high inflation. Despite this, interest rates have remained in the 35-bp range as investors look for safe havens and question the longer-term outlook. The benchmark 10-year U.S. Treasury yield is currently at 4.14%, right in the middle of its six-month range of 3.94% to 4.29%.
Over the month of February, the 10-year yield fell 30 basis points, while the two-year dropped 15 basis points, flattening the curve. However, strikes on Iran by the U.S. and Israel at the start of March reversed the trend, pushing yields back up sharply. Rates ended the first week of March up 15-20 bp across the curve.
Investors are divided over the implications for the market and the economy. There was some evidence of a flight to the dollar as a haven currency, but concern about the inflationary impact of disruptions to the energy sector led to lower demand (and higher yields) for Treasuries. Brent crude has risen to $92 per barrel, up nearly 52% year-to-date. Tanker traffic through the Strait of Hormuz has virtually shut down. Liquid natural gas production is straining against capacity constraints. And with missiles still falling, the risk of hostilities lasting longer and spreading further is hanging over markets.
Energy prices aren’t the only contributor to inflation. Even before the Iran strikes, the ISM manufacturing index of prices paid rose to 70.5, the highest level since 2022. Headline CPI moderated to 2.4% in January, but the Federal Reserve’s preferred measure of underlying inflation trends, core PCE (excluding volatile food and energy prices) rose to 3.0%. The producer price index was 2.9% higher year-over-year, and core was up 3.4%, well above the Fed’s 2.0% target. These numbers, along with higher energy prices, will put pressure on the Fed to delay rate cuts.
The labor market shed 92,000 jobs in February. Prior months were also revised downward by 69,000. Over the past six months, the U.S. economy has not created any net new jobs. The weak jobs release tamped down rates briefly.
Finally, now buried in the week’s news, the Supreme Court ruled that a major category of Trump’s tariffs was illegal. The administration will try to achieve its objectives in other ways, but there are significant uncertainties, delays and restrictions that will add to confusion among U.S. exporters, importers and their trade partners for months to come.
As the uncertainties pile up, policymakers and business leaders will have to proceed carefully. At the next FOMC meeting on March 17–18, the Fed will be weighing trade-offs between supporting the labor market with rate cuts or tamping down inflation with higher rates, but that is a longer-term concern. More immediately, the committee is widely expected to leave the Fed funds rate where it is until June, when the newly nominated Fed Chair, Kevin Warsh, takes the reins. In the meantime, markets will be watching geopolitical headlines to see whether long term rates will break out of their current range anytime soon.
Key Statistics: Interest Rates, Unemployment and Inflation
| Year-end 2022 | Year-end 2023 | Year-end 2024 | Year-end 2025 | January 27, 2026 | |
|---|---|---|---|---|---|
| 10-yr Treasury yield | 3.87% | 3.88% | 4.57% | 4.17% | 3.94% |
| 2-yr Treasury yield | 4.43% | 4.25% | 4.24% | 3.47% | 3.37% |
| Spread | -0.56% | -0.37% | 0.33% | 0.70% | 0.57% |
| Fed Funds Target (mid) | 4.375% | 5.375% | 4.375% | 3.625% | 3.625% |
| CME Term SOFR 1-mo | 4.36% | 5.35% | 4.33% | 3.69% | 3.67% |
| CPI (y/y change) | 6.5% | 3.1% | 2.7% | 2.7% | 2.4% |
| Core PCE (monthly) | 4.7% | 3.16% | 2.81% | 2.83% | 3.00% |
| 5-yr TIPS (market breakeven) | 2.38% | 2.15% | 2.39% | 2.27% | 2.51% |
| U-3 Unemployment | 3.5% | 3.7% | 4.1% | 4.4% | 4.3% |
| Real avg weekly earnings | -3.1% | 0.5% | 1.0% | 1.1% | 1.9% |
| Annual change in NFP jobs | +4,503,000 | +2,560,000 | +1,450,000 | +371,000 | +156,000 |
5-year US Treasury yield
Source: Bloomberg Finance LP
- Rates reacted sharply to headline news this week. Looking at the middle of the curve, the 5-year U.S. Treasury yield reached a 12-month low of 3.49% on February 27, then jumped 25 bp in the first week of March. After a brief pullback in response to weak jobs numbers, it ended the week at 3.73%.
Oil prices spike above $92 per barrel
Source: Bloomberg Finance LP
Job growth disappears
Source: Bloomberg Finance LP
Rates range-bound since September
- Two-year yields have traded between a low of 3.37% and a high of 3.66% over the past six months.
- Similarly, 10-year yields have stayed in a 35 bp band, from 3.94% to 4.29%.
- With the market caught between elevated inflation and a weak labor market, exacerbated by geopolitical uncertainties, a breakout from this range will depend on new information on any of these fronts.
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All rates shown are indications only and subject to change.
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