10-Year Treasury Yield Long-Term Perspective: August 2025
News Summary
This article reviews the long-term trends of the 10-year Treasury yield since 1962, exploring its relationship with key economic indicators such as the Fed Funds Rate (FFR), inflation, and the S&P 500. The 10-year Treasury yield has experienced dramatic fluctuations, from a peak of 15.68% in October 1981 during the Volcker era to a historic low of 0.55% in August 2020 amid pandemic-induced economic uncertainty. As of the end of August 2025, the weekly average stood at 4.25%. The piece highlights that during the stagflation crisis of the late 1970s and early 1980s, the Federal Reserve pushed the FFR to a historic high to curb runaway inflation. In contrast, the FFR was driven to near-zero levels after the 2008 financial crisis and the 2020 pandemic to stimulate the economy. The subsequent surge in inflation led the Fed to rapidly raise rates from May 2022 to August 2023. Interestingly, as the FFR began its cutting cycle in late 2024, the 10-year yield moved in the opposite direction, with inflation remaining sticky above the Fed’s 2% target. At the end of August 2025, the 10-year yield was 4.25% while inflation was 2.70%. The Fed held rates steady at 4.25-4.50% for the fifth consecutive meeting, noting that inflation remains “somewhat elevated.” The market anticipates two 25 basis point rate cuts in September and December 2025. The article also uses inflation-adjusted data to reveal the severe impact of stagflation on real equity and bond returns, emphasizing the FFR's role in managing inflation and economic growth.
Background
The 10-year US Treasury yield serves as a critical benchmark in global financial markets, reflecting expectations for long-term interest rates, inflation, and economic growth. The Federal Reserve implements monetary policy primarily by adjusting the Fed Funds Rate to achieve its dual mandate of price stability and maximum employment. Historically, during the stagflation era of the late 1970s and early 1980s, then-Fed Chair Paul Volcker aggressively tightened monetary policy, pushing the FFR to historic highs to curb rampant inflation. In contrast, following the 2008 Global Financial Crisis and the 2020 COVID-19 pandemic, the Fed adopted ultra-loose policies, bringing rates near zero and implementing quantitative easing to support the economy. Following the elevated inflation of 2021-2022, the Federal Reserve rapidly hiked interest rates from May 2022 to August 2023 to combat rising prices. Currently, in 2025, the market is closely watching the Fed's anticipated rate-cutting cycle and its implications for long-term Treasury yields, especially with inflation proving to be 'sticky'.
In-Depth AI Insights
Despite anticipated Fed rate cuts, why are long-term Treasury yields diverging from the FFR and inflation remaining sticky? - The market might be skeptical of the Fed's ability to sustainably bring inflation down to its 2% target without significantly harming economic growth. The Trump administration's potential for expansionary fiscal policies could lead to larger government debt issuance, increasing the supply of long-term bonds and putting downward pressure on their prices (i.e., upward pressure on yields). - Continued economic resilience, particularly in labor markets and consumer spending, could suggest that inflationary pressures are not fully dissipating but rather supported by structural factors such as supply chain reconfiguration and rising labor costs. - In the long run, if the market believes fiscal deficits will continue to expand, potentially leading to future monetary accommodation to support debt, then inflation expectations will remain elevated, thereby pushing up long-term yields even as short-term policy rates decline. Given 'somewhat elevated' inflation and anticipated 2025 rate cuts, how should investors assess the real return prospects for equity and bond markets? - Real returns (nominal returns minus inflation) will be the critical consideration. If inflation persists above the Fed's target, real purchasing power could erode even if nominal yields or stock prices rise. - Bond investors should be wary of a potential increase in term premium, as persistent inflation risk may demand higher compensation. This could lead to increased volatility in long-term bond prices and erode their traditional benefits during a cutting cycle. - In the equity market, sectors or companies with pricing power, strong cash flows, and inflation-hedging characteristics may perform better. Investors should be cautious of highly valued growth stocks, which are more sensitive to real rates, and instead focus on value or defensive plays. How might the political climate, specifically the incumbent Trump administration, subtly influence Fed policy independence and the trajectory of long-term yields? - The Trump administration's consistent advocacy for lower interest rates to stimulate the economy could lead to overt or subtle political pressure on the Fed to pursue more aggressive rate cuts, even if the inflation outlook remains ambiguous. - Policies prioritizing domestic industries and trade protectionism could lead to higher import prices, further exacerbating inflationary pressures and presenting a greater challenge for the Fed in balancing growth with inflation. - If the administration favors large-scale infrastructure spending or tax cuts to stimulate the economy, it could lead to further widening of the fiscal deficit and increased Treasury issuance. This would place upward pressure on long-term Treasury yields, potentially offsetting the downward impact of Fed rate cuts on long-term rates.