The Interest Rate That Matters Hasn’t Risen for Almost Six Months

May 5, 2023

After jumping over 4% in November of last year, the rate on the 10-year Treasury bond has not seen 4% again, except for a brief pop over 4% in March.  More recently it has been bouncing around the 3.5% range.  

The Fed has kept raising the overnight rate during the last six months to 5.25% as of May 3, but the rate that matters to the stock market, the 10-year rate, has not been affected much by those increases.  

This is also one of the fundamental drivers of this year’s stock market rally with the S&P up over 8% this year – averaging 2% per month.  The fact that rates are not rising will also help the economy avoid recession.  If rates were rising, a recession would be much harder to avoid.  

However, just because rates are no longer rising doesn’t mean they will fall quickly.  Although it’s possible they will fall, I would be careful about counting on any significant rate decrease this year. Yes, 3.5% is a much higher rate than the 1.5% rate we saw prior to the Fed rate increases of last year, but it is not enough in itself to push the economy into a significant recession or, more importantly, to greatly slow down this year’s stock rally.  

The key takeaway here is that rising interest rates on the 10 year Treasury bond, which single handedly created havoc in the market in 2022, are no longer rising, and haven’t been for a while. That’s just what the market needs to continue in rally mode.