Why are 10-year Treasury yields rising again?

Longer-term interest rates reversed a slight decline on Friday, as traders became less pessimistic about potential cracks in the banking system forcing the Federal Reserve to cut interest rates a bit more than planned.

The yield on the benchmark 10-year U.S. Treasury bond rate, which helps push up borrowing costs on mortgages, rose again to above 4% on Friday. It broke through that level on Thursday, when it closed at 3.97%, and fell again earlier on Friday before closing above 4%.

Last week’s declines followed concerns about the health of some banks’ loan portfolios, as problems emerged with a corporate borrower at two regional banks outside the West. Investors were already on guard after JPMorgan Chase CEO Jamie Dimon warned of potential cockroaches earlier in the week.

Investors “were driven by the perception that amid strong economic numbers, there are cracks in credit and valuation risks that are deepening and widening,” Victor Shvets, a strategist at Macquarie, wrote on Friday.

Analysts say the Fed is already preparing to cut interest rates later this month and in December, but a weaker economy could lead to further rate cuts in 2026. That could provide a boost to job growth if it is already faltering, while also lowering the interest rates borrowers pay on their bank loans and preventing further pressure.

“The idea that signs of stress are beginning to emerge in specific sectors of the real economy is consistent with the Fed’s efforts to normalize interest rates,” Ian Lingen, a strategist at BMO Capital Markets, wrote on Friday.

The Fed has already cut short-term interest rates from post-pandemic highs of 5.25% to 5%. After pausing for several months, the bank continued to cut interest rates again last month and reduced interest rates to a range of 4% to 4.25%. Fed officials have envisioned additional cuts this year.

Long-term interest rates, such as the 10-year yield or the 30-year mortgage rate, are affected by a series of factors. However, the outlook for Fed policy is one of the factors that push them up or down.

Investors do not appear to be betting on excessive Fed policy cuts, such as the massive 50 basis point cut at the Fed’s October meeting. The Fed tends to move interest rates in 25 basis point increments, and futures market pricing suggests trades see a 99% chance the Fed will stick to that strategy, according to CME Group’s FedWatch tool.

“There will be continued talk about the potential for 50 basis points of cuts, but we remain steady at 25 basis points twice for the rest of the year,” Andrew Brenner, vice chairman of NatAlliance Securities, wrote in a note to clients.

Next week’s inflation report will also be crucial, as a higher-than-expected jump in prices could force the Fed to be less aggressive in cutting interest rates.

Meanwhile, investors appeared to be in a more cheerful mood after Thursday’s stock market decline, which hit regional banks in particular hard. Last week’s tensions revived memories of 2023, when the collapse of Silicon Valley Bank raised concerns about regional banks as a whole.

The KBW Nasdaq regional banking index rose 1.7% on Friday, paring some of its losses after falling 6% on Thursday.

Meanwhile, regional bank CEOs who reported earnings on Friday told analysts that their portfolios remain broadly healthy.

“Credit quality is strong,” said Bill Rogers, CEO of North Carolina-based Truist Financial (TFC), adding that the bank will remain “very vigilant” about any signs of cracks.

For its part, Truist stock rose 3.67% at Friday’s close.