Invest1 publisher2 min readPublished
A 5% 10-year Treasury prices a dollar of cash flow due in ten years at 61 cents
Fortune asks whether 1970s stagflation is back now that the 10-year yields 5%. Its own figures put inflation at 3.4% against a 14.8% peak in 1980, while the discount rate has repriced every long-dated dollar.
The Investor · Invest desk
What happened
- The benchmark 10-year Treasury yield crossed 5% this month for the first time since 2007, capping a six-year climb from pandemic-era lows near 0.5%.
- Investor Ray Dalio told CNBC in April that the country is certainly in a stagflationary period, and that how it transpires has a lot of parts to it.
- In December 2021 the Fed's median projection put the funds rate at 4.4% by the end of 2022 and 5.4% in 2023, against the 0.1% rate then in force.
- The Fed began raising rates in March 2022 and took the federal funds target range to 5.50% by July 2023.
- The yield crossed 5% intraday in October 2023 and did not stay there, falling back as investors anticipated cooling inflation and the start of rate cuts.
Compiled by The InvestorSomething wrong?How this is made
Why it matters
- constraint Assets whose value sits in cash flows a decade out lose the most from a 5% anchor, and any model still discounting at pandemic-era rates carries roughly a third more value than the curve now supports.
- decision Every risk asset in a portfolio now has to beat about 1.6 points of real return available from the government, so the choice to hold equity duration is an active one again.
- exposure Anyone who bought 10-year paper when it yielded around 1.5% at the end of 2021 is marked against a 5% market, and the loss is in the price whether or not the position is sold.
- contradiction Fortune calls the Fed's position lose-lose on high inflation and weak growth while reporting 3.4% inflation and 4.1% unemployment, so the label overstates what the figures show.
Discount a dollar of cash flow due in 2036 at 5% and it is worth about 61 cents, because 1.05 to the tenth power is 1.63 [1][1]. Run the same dollar back at 0.52%, the record low the 10-year touched in 2020, and it is worth about 95 cents [2][2]. Nothing about the forecast changed between those two numbers, only the price of waiting for it, by about 35% [3].
The 1970s comparison does not survive the numbers in the same article. Inflation peaked near 14.8% in March 1980 against 3.4% now [5], and unemployment topped 9% in the mid-decade oil shock against roughly 4.1% [6]. Add each pair and today's 7.5 sits against 23.8 then [5]. Paul Volcker took the federal funds rate to 20% by 1981, and the recession that followed pushed unemployment above 10% [8]. Fortune, which puts the stagflation question in its own headline, says today does not come close to the 1970s crisis [7].
The repricing began with a Fed that expected the 2021 inflation to fade, citing supply constraints and the reopening economy [10]. "Inflation at these levels is, of course, a cause for concern," Jerome Powell said in an August 2021 speech, adding: "But that concern is tempered by a number of factors that suggest that these elevated readings are likely to prove temporary" [9]. In September 2021 the FOMC still held the funds target at 0% to 0.25% [11]. CPI came in at 9.1% in June 2022, the highest twelve-month reading since 1981 [13]. The 10-year sat around 1.5% at the end of 2021, so the benchmark has added three and a half points since [15][6].
Investors price cuts again, as they did after the 2023 print [16], and a 4% discount rate puts that 2036 dollar back at 68 cents [7]. Or federal deficits and Treasury issuance, which Fortune lists among the drivers alongside tariffs, energy prices and Iran [18], hold the yield up whatever inflation does. In my view the second is the more useful base case for an allocator, because it marks down long-dated cash flows whether or not growth weakens, and a sustained retrace to 4% is what would disprove it. The last time the market ran this repricing, Fortune reports, the S&P 500 fell 19%, its worst since 2008 [17].
What to watch
- Whether the yield holds above 5% for a full quarter or retraces the way it did after the October 2023 intraday cross.
- The next CPI print against the 3.4% Fortune cites: inflation back near 2% with the 10-year still at 5% would put the rise on term premium.
- Treasury issuance and deficit figures, which Fortune names among the drivers of the six-year climb.