The most important interest rate
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The most important interest rate in the country isn't the fed funds rate, which was lowered Wednesday to below 5%, but rather the yield on the 10-year Treasury note, which rose Wednesday to 3.71% from a closing level of 3.65% on Tuesday.
Why it matters: Most corporations and individuals don't borrow money overnight. When they borrow for long-term investments, including mortgages, the cost of money is priced off the 10-year Treasury yield.
The big picture: The 10-year yield has been below the fed funds rate for almost two years — a sign the markets expected high interest rates to be a reasonably temporary phenomenon.
- That means future rate cuts have always been priced in — and that mortgage rates won't necessarily fall further just because the Fed is now in cutting mode.
- After all, mortgage rates are already down 1.6 points from their October high. By contrast, the 10-year yield is down only 1.3 points since then.
The bottom line: The 10-year yield looks high by the standards of what has been normal since the global financial crisis of 2008-09. But if the new normal looks more like the pre-crisis normal, then long-term interest rates are already pretty low — and might not go much lower.
