The Week in Review: May 26, 2026
Bond Yields on the Rise
What’s driving bond yields higher? Since the recent low, the 10-year Treasury yield has climbed nearly three-quarters of a percentage point. The 10-year is a key benchmark because many borrowing rates, including mortgage rates, closely track its movements.
We’ve also seen a significant rise in the yield for the 2-year bond. The 2-year yield is considered a proxy for the eventual direction of the all-important fed funds rate.
The graph highlights that the 2-year yield has moved above the fed funds rate. Over the last 30 years, the Fed has hiked the fed funds rate every time this has occurred, according to BCA Research.
The 30-year Treasury bond yield (not shown above) recently reached its highest level since 2007, according to Bloomberg.
Why are yields rising?
Markets believe that the Federal Reserve will eventually be forced to raise interest rates.
The reason: the rate of inflation is rising.
In addition, the economy has been more resilient than many had expected.
Consumer spending has held up in the face of higher gasoline prices (at least so far).
Business investment has soared amid the build-out of AI data centers. In the short run, that increases the demand for resources, which may be putting upward pressure on prices at a time when oil and other commodities have risen in price.
In the absence of an immediate increase in the fed funds rate (unlikely), the bond market is tightening financial conditions by pushing bond yields higher.
Earlier in the year, however, there were expectations that the Fed might cut rates later in the year.
Incoming Fed Chairman Kevin Warsh has said he favors lowering the fed funds rate. He has also advocated numerous changes at the Fed.
But he’ll have to persuade skeptical Fed officials that have put the possibility of a rate increase (or increases) on the table, according to the minutes released from the April Fed meeting. Stay tuned.
Market summary
Two FOR THE ROAD
Here's a fun one for the graduation party circuit: the tradition of throwing your cap into the air started in 1912 at the U.S. Naval Academy. Newly-commissioned midshipmen tossed their old hats because they were about to receive their formal officers’ hats. Out with the old, in with the new. Civilians liked the symbolism so much they kept the toss, even without the upgrade waiting on the other side. - HISTORY, May 8, 2023
"Spend each day trying to be a little wiser than you were when you woke up. Day by day, and at the end of the day — if you live long enough — like most people, you will get out of life what you deserve." - Charlie Munger
I hope you have a wonderful week!
Warmest Regards,
Bill Stordahl, CFP®
Managing Director
Stordahl Capital Management
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