‘Normal’ Bond Yields?
A return to ‘normal’ should imply more regular economic policy accommodation, a continued advance in the U.S. stock market, and a significant decline in the real yield structure within the U.S.
The 30-year national average fixed mortgage rate declined to 6.17% last week to its lowest level since September 2022 – a nearly three and one half year low! Similarly, the 2-year U.S. Treasury yield collapsed to 3.4% on February 13th – its lowest level since August 26, 2022 – before settling last week at 3.47%. Finally, the 10-year U.S. Treasury yield reached 4.01% briefly on February 17th reaching a level it first reached back in October 2022.
A slew of weaker than expected economic reports have recently challenged the multi-year floor on the U.S. interest rate structure. Recent job disclosures suggest labor market conditions have been far weaker than anticipated. Challenger job cut announcements surged by 118% in January, weekly ADP job numbers remain subdued, JOLTS job openings collapsed in last year’s fourth quarter declining to their lowest level since September 2020, and huge negative nonfarm payroll revisions for 2025 suggest employment growth nearly flatlined last year. Core retail sales spending declined by 0.1% in December during what is traditionally the biggest month of the year for retail spending, existing and pending home sales were weak in January, and the NAHB Home Builders Index declined in both January and February persisting at very depressed levels. Both the CPI and core CPI reports were surprisingly better than expected in January, the February U.S. consumer sentiment index remained near record lows, and 2025 fourth quarter U.S. real GDP was far less than expected at only 1.4%.
Since surging during the post-2020 pandemic inflationary fallout, real U.S. economic growth has finally slowed to a pace which is forcing bond investors to consider what the ‘new normal’ for bond yields will be? From its low near 0.5% in mid-2020, the 10-year Treasury yield rose to about 4.25% by October 2022, following a peak in the annual CPI inflation rate of 9.1% in June 2022. Annual real GDP growth was an amazingly strong 12.4% in mid-2021, 5.8% by December 2021 and still at a healthy pace of 3.4% in December 2023. These robust economic growth readings kept the 10-year yield structure mostly between 4% to 5% during the last couple of years. However, as of December 2025, the annual growth in real GDP has slowed to just 2.2% and annual nonfarm job growth to only 0.2%!
