Why Lower Interest Rates May Not Deliver the Affordability Washington Wants

The nonpartisan Congressional Budget Office said last week that it expects the Federal Reserve’s key interest rate to dip to 3.4% by the end of the year, where it will settle until the end of President Trump’s term in 2028. That’s down from 3.9% in the fourth quarter of 2025. 

But not everything seemingly logical will follow thereafter. Despite the Fed rate cuts, the CBO projects the yield on 10-year Treasury notes — which matters to you because it influences interest rates on auto loans, mortgages and credit cards — will rise little by little, from 4.1% in Q4 2025 to 4.3% at the end of 2028.

Inflation Nation

Last year, the Fed’s rate-cutting spree that trimmed 75 basis points was the key driver of a bond market rally. That’s because lower policy rates typically push down yields, and that increases the value of earlier bonds that were sold with higher payouts. At the same time, robust corporate profits kept the additional yield investors require to hold corporate bonds instead of Treasuries near historic lows (analysts estimate S&P 500 firms’ earnings rose 13% last year, according to LSEG). At the end of the day, the Morningstar US Core Bond TR YSD index returned 7.3% last year, the highest in five years.

The Trump administration would prefer that the past remain prologue and interest rate cuts continue to signal a bond rally, pushing down yields, and ultimately lowering borrowing costs. The White House has even taken steps that seem designed to reduce the key 10-year Treasury yield, most recently instructing Fannie Mae and Freddie Mac to purchase $200 billion in mortgage-backed securities to apply downward pressure on interest rates. Meanwhile, markets are pricing in roughly a 33% chance of two quarter-point cuts this year, according to CME FedWatch.

But the 10-year yield has remained stubbornly high of late, especially relative to the two-year yield: In recent days, the spread between the two, which registered at 63 basis points on Friday, has been hovering near the highest levels since April. Markets call this a steepening yield curve, and it potentially signals a few things:

• Namely, that investors foresee higher long-term inflation and/or economic growth, which makes them demand a higher yield to offset those things eating into their return. Indeed, Morningstar predicts inflation will rise to 2.7% in 2026 from 2.6% last year, as businesses increasingly pass on tariff costs to consumers.
• Another investor concern that may keep yields on longer-dated bonds elevated is the federal deficit, which the CBO projects will be $1.7 trillion (or 5.5% of GDP, zoinks!) in fiscal year 2026.

Still A Good Bet: “For investors, the bond market remains a source of stability and reliability in uncertain times,” analysts at Raymond James wrote earlier this month, noting Treasurys remain a tried and true safe haven. “We do not expect any dramatic sustainable moves and see the 10-year Treasury yield ending 2026 in the 4.25% to 4.5% range.”