Why the 10 Year Treasury Yield Is Falling After the Fed Raised Rates

The 10 year Treasury yield fell below 5% Thursday, one day after the Federal Reserve raised its benchmark interest rate. At 10:17 a.m. Eastern, the yield stood at 4.950%, down 7.3 basis points from the previous close of 5.023%, according to Tullett Prebon data displayed by MarketWatch.

For homebuyers and homeowners considering a refinance, the decline creates room for better mortgage pricing. Understanding why starts with the distinction between the overnight rate the Fed targets and the longer term returns bond investors demand.

On September 16, the Fed increased its target range by 25 basis points to 3.75% to 4.00%. A basis point is one hundredth of a percentage point. The Fed’s statement described inflation as elevated and said the increase would support a return to its 2% goal.

The 10 year yield reflects expectations for interest rates over many years, along with compensation for uncertainty. If tighter policy reduces the risk of persistent inflation, investors can accept lower long term yields even while overnight borrowing becomes more expensive.

Wednesday’s Treasury data show how those forces can offset each other. Comparing ordinary Treasury yields with yields on Treasury Inflation Protected Securities, or TIPS, shows how much inflation compensation changed.

Measure	September 15	September 16	Change
2 year Treasury yield	4.67%	4.74%	Up 7 bp
10 year Treasury yield	5.00%	5.01%	Up 1 bp
10 year TIPS yield	2.62%	2.68%	Up 6 bp
10 year inflation compensation	2.38%	2.33%	Down 5 bp

Source: U.S. Treasury nominal and real yield curves. Inflation compensation is calculated as the difference between the two 10 year yields. These official afternoon observations are separate from Thursday’s traded benchmark quote.

Wednesday’s six basis point increase in the real yield was largely offset by a five basis point decline in inflation compensation, leaving the ordinary 10 year yield one basis point higher. That helps explain why a quarter point Fed hike need not produce a comparable increase in longer term borrowing costs.

The distinction matters: Wednesday’s official 10 year yield rose slightly. Thursday’s decline is a separate move. And inflation compensation includes both expected inflation and adjustments for risk and liquidity, so the five basis point decline cannot be read as a pure change in inflation expectations.

Oil supplied another relevant development Thursday. October WTI crude futures were quoted at $100.39 a barrel at 10:12 a.m. Eastern, down $2.04, or 1.99%, from Wednesday’s settlement, according to MarketWatch’s delayed futures data. Sustained lower oil prices would ease pressure on fuel costs and headline inflation.

Taken together, the decline in inflation compensation and Thursday’s lower oil prices support the interpretation that easing inflation concerns are contributing to demand for bonds. The available data cannot isolate how much of Thursday’s rally comes from the Fed’s action, cheaper oil or changes in trading positions.

The Fed itself has not signaled a rapid move toward lower rates. Its September projections put the median federal funds rate at 4.1% at the end of 2027, up from 3.6% in June. Those projections describe policymakers’ views, rather than a commitment or a measure of what investors had already expected.

Thursday’s employment data also offer little support for attributing the rally to a sudden increase in layoffs. Initial unemployment claims fell to 196,000 from 206,000, according to the Labor Department. One weekly report cannot settle the growth outlook, but this reading showed fewer new claims.

For mortgage borrowers, the next step is whether better bond prices reach lenders’ rate sheets. Fixed mortgage pricing is closely connected to mortgage backed securities, which represent pools of home loans. Treasury yields provide an important reference, but mortgage bonds have their own investor demand and risks, including borrowers paying loans off early.

A seven basis point decline in the 10 year therefore does not guarantee a seven basis point reduction in a mortgage rate. Improvements may appear as a lower rate, fewer discount points or a larger lender credit. The size and timing depend on mortgage bond prices, lender pricing and the specific loan.

Borrowers comparing offers should keep the loan terms and lock period consistent and compare both the interest rate and upfront costs. Thursday’s Treasury decline is encouraging for mortgage pricing. The benefit becomes concrete when a lender offers a better combination of rate and cost.