Monthly Interest Rate Update
Interest rates continued their upward march in July, as oil prices continue to fluctuate following the changes in the situation in Iran. Persistent inflation and strategically vague direction from the Federal Reserve are reinforcing the market’s expectation for rate hikes in the future, even though they did not raise rates in July. Meanwhile, Treasury Secretary Scott Bessent announced the continued issuance of short-term T-bills to continue funding the federal government.
Warsh’s “strategic vagueness” fuels rate uncertainty
The outlook for interest rates is getting foggier as Warsh declines to offer guidance about the direction of Fed policy. As expected, Federal Reserve policymakers held rates steady at the July 29 FOMC meeting, despite three dissenting votes calling for a rate hike. Fed Chair Kevin Warsh has signaled his intent to scale back Fed communications, relying on the market to make its own assessment of the appropriate path of monetary policy. In practical terms, he has cut the length of the traditional post-meeting policy statement in half, declined to contribute to the “dot plot” forecast, and offered non-answers to many of the questions at his post-meeting press conference. He has also floated the idea of holding fewer press conferences and reducing the number of FOMC rate-setting meetings from eight to six.
Warsh has set up task forces to make recommendations in five areas of Fed policy including communications, so he is unlikely to make any substantive changes until next year. In the meantime, his strategic vagueness is adding to market uncertainty. He has promised to be diligent in bringing inflation back down to 2% (from the current level of 3.5%) but has offered little clarity about how the Fed will accomplish that. He has suggested using different measures of inflation, leading to concern that he might simply try to “define the problem away.”
In the immediate wake of last week’s FOMC meeting, 2-year yields fell and longer-term rates rose, driving the yield curve steeper by 13 basis points. 30-year yields reached a 19-year high of 5.27%, continuing their steady six-year climb. And looking ahead, futures traders are anticipating an 82% chance of as many as three rate hikes by year-end. These sudden shifts in the curve and policy expectations reflect investor concerns about the Fed’s inflation-fighting credibility.
Interest rates also continue to be buffeted by volatile oil prices and the shifting winds of the Iran war. Rates have risen substantially since the Iran war was launched in late February, with two-year Treasuries up 83 basis points and the ten-year 67 basis points higher. Both rate benchmarks have mirrored movement in oil prices as the conflict has ebbed and flowed. Since May, rates have risen faster than oil as the market recognizes the wider long-term ramifications of the war.
Treasury Secretary Scott Bessent is working to offset these pressures and keep a lid on long-term rates. The US Treasury Department released their official quarterly refunding statement today, indicating that coupon issuance (long term notes and bonds) will be unchanged “for at least the next several quarters.” This is a signal to markets that debt issuance will remain skewed toward short-term T-bills, which currently represent 22% of total Federal debt outstanding. This is a historically elevated level and will only rise as total borrowing needs go up. Treasury had previously announced a $68 billion increase in government funding needs, bringing the total for the coming quarter to $739 billion.
Bessent also joined forces with the Bank of Japan to support the yen in currency markets, the first time they have done so since 1998. The yen fell to a 40-year low last month, creating challenges for trade flows not only in Japan but in the wider Asian market. It also created a risk for US Treasury yields. Japan is the largest holder of US debt, so when they sell the dollar to buy yen, they have to liquidate part of their US Treasury holdings. This puts upward pressure on US bond yields. By staging a coordinated $35 billion currency intervention and allowing Japan to tap into a Treasury Department repo facility instead of selling US bonds, the US helped a trading partner and protected itself from higher yields.
These cross-currents of uncertainty make it even more important to proactively manage interest rate risk. Whether you are exposed through floating rate debt, maturing term loans, high deposit balances, or your investment portfolio, Associated Bank can help you understand the markets and the tools you have available to mitigate the risks.
Key Statistics: Interest Rates, Unemployment and Inflation
| Year-end 2022 | Year-end 2023 | Year-end 2024 | Year-end 2025 | July 31, 2026 | |
|---|---|---|---|---|---|
| 10-yr Treasury yield | 3.87% | 3.88% | 4.57% | 4.17% | 4.73% |
| 2-yr Treasury yield | 4.43% | 4.25% | 4.24% | 3.47% | 4.29% |
| Spread | -0.56% | -0.37% | 0.33% | 0.70% | 0.44% |
| 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% | 3.65% |
| CPI (y/y change) | 6.5% | 3.1% | 2.7% | 2.7% | 3.5% |
| Core PCE (monthly) | 4.7% | 3.16% | 2.81% | 2.83% | 3.3% |
| 5-yr TIPS (market breakeven) | 2.38% | 2.15% | 2.39% | 2.27% | 2.20% |
| U-3 Unemployment | 3.5% | 3.7% | 4.1% | 4.4% | 4.2% |
| Real avg weekly earnings | -3.1% | 0.5% | 1.0% | 1.1% | 0.3% |
| Annual change in NFP jobs | +4,503,000 | +2,560,000 | +1,450,000 | +371,000 | +510,000 |
Spread between 2y and 10y Treasury yields jumps
Source: Bloomberg Finance LP
-
In the wake of the most recent Fed meeting, the Treasury yield curve steepened abruptly on concerns about Warsh’s lack of clarity and questions about what practical actions the Fed may take to rein in persistent inflation.
Federal debt issuance skewed toward T-bills
- The Treasury Department is relying heavily on T-bills to fund government operations.
Treasury yields up significantly since February
- Yields across the Treasury curve are up 55 to 80+ bp since February lows after a choppy 2025.
Associated Bank offers a wide range of instruments for hedging interest rate, commodity and foreign currency risk, including foreign exchange in more than 75 currencies. Companies interested in learning more about these instruments should contact their Associated Bank Relationship Banker or the bank’s Capital Markets Department at 866-524-8836.
All rates shown are indications only and subject to change.
This material is provided to you for informational purposes only; and any use for other than informational purposes is disclaimed. It is a summary and does not purport to set forth all applicable terms or issues. It is not intended as an offer or solicitation for the purchase or sale of any financial product and is not a commitment by Associated Banc-Corp, its subsidiaries or affiliates, as to the availability of any such product at any time. The information herein is not intended to constitute legal, tax, accounting, or investment advice, and you should consult your own advisors as to such matters and the suitability of any transaction. We make no representations as to such matters or any other effects of any transaction. In no event shall we be liable for any use of, for any decision made or action taken in reliance upon, or for any inaccuracies or errors in, or omissions from, the information herein. The views expressed here are solely those of the author and do not reflect the views of Associated Banc-Corp, its subsidiaries or affiliates.
