Growth Scare Suppressed Yields

Last Updated: February 26, 2025

Key Takeaways

Yesterday, Treasury yields declined as investors got nervous about growth, with the 10-year yield temporarily dipping below 4.30%.
Consumer confidence fell in February, creating the catalyst for a decline in yields.
Recent signs of a downshift in growth led markets to price in two cuts by the Federal Reserve (Fed) in the latter half of this year.
On the plus side, improving loan demand suggests more capital expenditures.

A Mixed Bag

The Conference Board’s Consumer Confidence Index is composed of two main components: the Current Situation Index and the Expectations Index. The Current Situation Index measures consumers' perceptions of present economic conditions, including their views on current business and employment. This component reflects how consumers feel about the economy right now and for all intents and purposes, things are pretty good, although still below pre-pandemic levels.

On the other hand, the Expectations Index gauges consumers' outlook for the economy over the next six months, including their expectations for business conditions, employment, and income. This component provides insight into consumers' future economic optimism or pessimism, and here is where things seem less rosy.

Bond investors likely focused on the expectations component as yields on the 10-year Treasury fell to their lowest since December.

The Good, the Bad, and the Ugly

Yesterday’s Conference Board report had some good things to say about the consumer. According to the data, an increasing number of consumers plan to buy a home in the next six months. The index rose to 5.6, up a full point from a year ago. Declining mortgage rates helped improve demand for residential real estate. As of February 25, the 30-year fixed-rate national average was roughly 40 basis points below the highs last month.

But there are some bad signals too, especially in the labor market. The labor differential — those reporting jobs plentiful minus jobs hard to get — deteriorated in February as the labor market seemed softer to consumers. The unemployment rate should rise in the coming months.

The rise in inflation expectations was downright ugly. The Conference Board reported average inflation expectations rose to their highest since late 2023. One note of caution: consumer surveys are volatile, so investors should focus on the hard data.

Slowing but Still Growing

We expect the economy to downshift this year but still post growth in the first half of the year. Business spending appears to be on the cusp of improving this year. According to the latest Fed’s survey from senior loan officers, lending standards eased, and commercial and industrial (C&I) loan demand improved. If the downshift in growth is meaningful, the markets could be right about two rate cuts this year, but only if the inflation backdrop improves. No doubt easing inflationary conditions would be a positive catalyst for markets.

Less Tightening From Banks

And improving trajectory in demand

Source: LPL Research, Federal Reserve Board 02/25/25

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Dr. Jeffrey Roach

Jeffrey Roach guides the overall view of the economy for LPL Financial Research and has over 20 years of experience in investing and economics.