10-Year Treasury Yield Long-Term Perspective: May 2025

An analysis of the 10-year Treasury yield's historical trends since 1962 reveals its inverse relationship with the Fed Funds Rate (FFR) and the S&P 500, though both can move in tandem during inflationary periods. The 10-year yield hit a peak of 15.68% in 1981 and a low of 0.55% in 2020, reflecting the Fed's monetary policy shifts between curbing inflation and stimulating growth; as of May 31, 2025, the 10-year yield weekly average stood at 4.44% while inflation was at 2.3%. Despite the Fed's expected rate cuts, the 10-year yield moved in the opposite direction during the back end of 2024, and the S&P 500 has shown resilience even during periods of high interest rates.

Analysis

The 10-year Treasury yield stood at a weekly average of 4.44% as of May 31, 2025, with inflation recorded at 2.3%, reflecting a dynamic interest rate landscape influenced by historical policy responses and current economic conditions. The yield has demonstrated significant historical volatility, peaking at 15.68% in October 1981 during the Volcker-led Federal Reserve's aggressive campaign against stagflation (which saw the Fed Funds Rate, FFR, reach 20.06% in January 1981), and bottoming out at 0.55% in August 2020 amidst pandemic-related economic stimulus measures where the FFR neared 0.04%. Following a period of rapid FFR increases from May 2022 to August 2023 to combat the highest inflation since the 1970s/80s, the Federal Reserve initiated a rate-cutting cycle in September 2024. A key development emerged in late 2024: the 10-year yield moved counter to FFR cuts, trending upwards while inflation remained stubbornly above the Fed's 2% target. Current market expectations, via the CMEFedWatchTool, price in two additional 25 basis point rate cuts by the Fed in 2025. Historically, equities and Treasuries generally exhibit an inverse relationship; however, during inflationary periods, such as observed recently, they can move in tandem due to the impact of higher rates on both corporate profitability and bond valuations. The analysis underscores the importance of considering inflation-adjusted returns, as periods like the stagflation from the mid-1960s to 1982 saw significant declines in real equity values, highlighting how high nominal yields can be deceptive when inflation is elevated. Despite these complex dynamics and questions regarding the efficacy of Fed interventions in stimulating growth, the S&P 500 has often demonstrated resilience, achieving record highs even during periods of elevated interest rates.

Key Decisions for Investors

• Investors should closely monitor the divergence between the Federal Reserve's rate-cutting path and the 10-year Treasury yield's upward trajectory, particularly as inflation persists above the 2% target, which could signal sustained pressure on long-term rates and affect fixed-income portfolio valuations.
• Given that historical stagflationary periods have led to significant erosion of real returns for both equities and bonds, it is prudent to assess current portfolio allocations for resilience against sticky inflation and consider the real purchasing power of expected returns.
• While the S&P 500 has historically shown resilience to higher interest rates, the observed tendency for equities and Treasuries to move in tandem during inflationary environments warrants a re-evaluation of traditional diversification strategies, as this correlation can reduce hedging benefits.
• Holders of Treasury-related ETFs such as VBIL, VGIT, and VGLT should be cognizant of the potential for increased volatility and duration risk if long-term yields continue to rise or remain elevated despite anticipated Fed Funds Rate reductions.