Bob Graham – Riggs Asset Management Company

Hi there. This is Bob Graham with Riggs Asset Management Company.

Today I want to continue our conversation about what we see coming down the road for 2026.

As we mentioned in previous updates, we believe 2026 should be a good year overall, although it will likely be somewhat bumpy. Much like last year, we expect the markets to move two steps forward and one step back, but overall we remain optimistic about the outlook.

In a previous video, we discussed some of the tailwinds supporting the economy, including changes in tax policy that could benefit both households and corporations, potentially supporting economic growth and the financial markets.

Today, I want to talk about another important factor: the interest rate cycle.

We’ll focus on:

• Interest rates

• Inflation

• The housing market

• What we believe the Federal Reserve may do next

The Importance of the Two-Year Treasury

As you know from previous videos, we pay very close attention to the two-year U.S. Treasury yield.

Historically, the two-year Treasury has often led the Federal Reserve, meaning changes in the two-year yield tend to occur before the Fed adjusts its policy rate.

Right now, the two-year Treasury is signaling that the Federal Reserve may cut interest rates one to two more times this year.

What’s especially interesting is that the two-year Treasury yield has now reached its lowest level in roughly three years.

If it continues to break lower, it could signal further declines in short-term interest rates.

When we look across the broader bond market, we see a similar trend.

For example:

• Mortgage rates have been hovering around 6%, but appear to be gradually trending lower

• The 10-year Treasury yield has also been declining

Overall, the entire yield structure across the bond market appears to be drifting downward.

The Role of Inflation

One major reason for this trend involves inflation, specifically a key component known as shelter costs.

Shelter is extremely important because it represents approximately 36% of the Consumer Price Index (CPI).

That means changes in housing costs have a significant impact on overall inflation.

When we look at housing data today, we see several important trends.

First, existing home prices have been rising very slowly.

Over the past year, existing home prices have increased by less than 1%, and the rate of price growth has been gradually declining over the past few years.

Second, new home prices have actually been declining, with builders in some areas cutting prices to attract buyers.

Third, rental prices, another important part of the shelter category, have also been moderating or declining.

The key point is this:

If more than one-third of the inflation index is flat or moving downward, it becomes very difficult for the overall inflation rate to rise significantly.

Implications for Interest Rates

Because of these trends, we believe inflation will likely continue moderating over the next few years.

If inflation continues to ease — and if the Federal Reserve continues to follow signals from the bond market — we may see additional interest rate cuts during 2026.

That could lead to lower borrowing costs across the economy.

For example, we believe mortgage rates could move into the mid-5% range, possibly reaching around 5.5% by the end of the year.

Lower mortgage rates could help reopen opportunities for buyers in the housing market.

It’s also important to remember that housing trends tend to move slowly.

People don’t buy or sell homes every year, so changes in housing costs often unfold gradually over long periods of time.

That means the moderating pressure on inflation could persist for several years.

What This Means for the Economy

When we step back and look at the broader picture, we see several forces shaping the economy:

• Demand driven by artificial intelligence infrastructure

• Continued reshoring of manufacturing

• Potential economic stimulus from tax policy changes

• Moderating inflation, particularly in housing

Together, these factors suggest the economy could continue growing steadily.

At the same time, lower interest rates would provide an additional tailwind for both businesses and consumers.

Because of this, we believe the bond market is correctly signaling lower interest rates ahead, and we expect the Federal Reserve may follow that signal with one or two rate cuts this year.

Looking Ahead

If interest rates continue moving lower, it could benefit:

• Consumers, through lower borrowing costs

• Businesses, through easier access to capital

• Financial markets, through improved economic conditions

In our view, this represents another positive tailwind for the U.S. economy.

If you have any questions about this update — or about your portfolio, the markets, or your personal financial situation — please don’t hesitate to reach out to your Riggs team member.

We’re always here to help.

Thank you.