Here is the thing worth understanding before Wednesday afternoon: the number the Federal Reserve votes on is not the number that sets your mortgage.
On Monday the 10-year Treasury yield crossed 5%. On Tuesday it reached 5.041% in overnight trading — its highest level since 2007 — before settling at 4.995%. The Dow fell 328 points, the S&P 500 slipped 0.4% and the Nasdaq slid 0.8%, the second straight session lower.
Spencer Jakab put the point plainly in Heard on the Street: that benchmark, “not the overnight rate decided by human beings at the Fed, is what really matters to stock prices and to home buyers.”
How rare this is, and how recently it wasn’t
Before this week, the 10-year had touched 5% exactly once since the 2008 financial crisis — during a single trading session in 2023. It has now done it twice in two days.
The move has been fast. The market-implied chance of a rate increase was one-third in mid-August. After Chairman Kevin Warsh’s tough talk on inflation at a gathering of central bankers last month, it went to two-thirds. By Tuesday, per CME FedWatch, it was 95%.
The bond market is not waiting to find out. The gap between the 2-year Treasury yield and the Fed’s overnight rate widened to a multiyear high on Monday — which usually means the market has already penciled in at least one more quarter-point increase.
The uncomfortable part
Jakab’s argument is that stock investors should be hoping for a hike, which sounds backward until you follow it.
For fifteen years the reflex has been that good economic news is bad market news, because it raises the odds of tightening. That reflex assumes the Fed is in control of the long end. Warsh’s first meeting as chair, in late July, tested that: many bond traders bet on a hike and were wrong, and his explanation for holding helped push longer-term rates up.
Jeffrey Gundlach — chief investment officer at DoubleLine Capital and, as the Journal puts it, probably the world’s most influential bond fund manager — said on a podcast last week: “There’s something about Kevin Warsh that I don’t fully trust.” He would expect long-term rates to rise fairly significantly if the Fed held.
So the asymmetry is real. As Jakab closes: “One or two rate increases will hardly affect Main Street, or Wall Street for that matter. An out-of-control Treasury market sure would.”
What a household should take from a 5% benchmark
Three things, none of which require knowing what happens Wednesday.
Anything long has already been repriced. Long Treasuries and long-duration bond funds take the damage when the benchmark moves, and most people own them inside a fund labelled “core” or “aggregate” that they never chose deliberately.
Anything short has had a raise. A short Treasury bill rolls into whatever rate comes next. That is the one place in a portfolio where higher rates are straightforwardly good news.
Anything being borrowed is more expensive. The 30-year mortgage tracks this yield, and it has gone with it.
The forecast is on the wall with a date attached. That is the easiest kind of weather to dress for — fifteen minutes and a recent statement will show which parts of the plan just repriced.