This article examines the historical trends of the 10-year Treasury yield since 1962, highlighting 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 seen significant fluctuations over the decades, peaking at 15.68% in October 1981 during the Volcker era and dropping to a historic low of 0.55% in August 2020 amid pandemic-related economic uncertainty. As of the end of September 2025, the weekly average stood at 4.16%.
The stagflation crisis of the late 1970s and early 1980s necessitated drastic measures. Under Paul Volcker’s leadership, the Federal Reserve raised the FFR to a staggering 20.06% in January 1981. Just nine months later, the 10-year yield reached its peak of 15.68%. This aggressive monetary tightening was crucial in curbing rampant inflation, albeit at the cost of a significant economic slowdown.
In stark contrast, the FFR was slashed to near-zero levels following the 2008 financial crisis and again during the economic turmoil of the 2020 pandemic. Specifically, the FFR hit a record low of approximately 0.04% in May 2020. Subsequently, the 10-year yield fell to its historic low of 0.55% in August, as these ultra-low interest rates aimed to stimulate borrowing, investment, and economic recovery.
Following these events, inflation surged to levels not seen since the stagflation crisis. In response, the Fed began raising rates to combat inflation, with some arguing that their actions came too late. From May 2022 to August 2023, the Fed rapidly increased the FFR to its highest level in over 20 years. Interestingly, while the FFR was held steady for over a year as inflation cooled from its peak, the 10-year yield moved in the opposite direction. By September 2024, the Fed initiated a rate-cutting cycle, yet inflation remained stubbornly above the Fed’s 2% target.
By the end of September, the 10-year yield averaged 4.16%, while inflation was at 2.92%. The Fed implemented a widely anticipated 25 basis point cut to the FFR, bringing it to a range of 4.00%-4.25%. This marked the first rate cut of the year, with expectations for two more quarter-point cuts before the year ends. The Fed’s statement indicated a commitment to returning inflation to its 2% objective, with the market pricing in two additional cuts for the remainder of the year, one in October and another in December, as per the CME FedWatch Tool.
Treasuries vs. Equities
In the next chart, the S&P 500 is overlaid with the 10-year yield’s weekly average and the Fed Funds Rate. Generally, equities and treasuries tend to move in opposite directions; when one rises, the other falls. However, this is not always the case. During inflationary periods, such as the past few years, both have moved in tandem due to the impact of higher interest rates on corporate profits and bond prices. The initial chart presents nominal values, which do not account for inflation, potentially misleading the actual purchasing power of yields and equity returns.
The same chart is presented with the S&P 500 and 10-year yields adjusted for inflation using the Consumer Price Index (CPI). This adjustment provides a clearer understanding of real returns, revealing the severe impact of stagflation, particularly the significant decline in real equity values from the mid-1960s to 1982. It also illustrates why high yields can be misleading during periods of elevated inflation, as evidenced by the stagflation of the 70s/80s and more recently.
The FFR line provides valuable insights into the Federal Reserve’s monetary policy. It illustrates how the Fed has utilized rates to control inflation, stimulate growth, and apply brakes when necessary. The top chart is annotated with the tenures of various Fed chairmen, allowing us to see who managed the different FFR cycles since 1960.
Examining the FFR’s historical extremes—from the 20.06% peak in 1981 to the 0.04% trough in 2020—underscores the Federal Reserve’s ability to implement dramatic policy shifts in response to economic conditions. In the early 1980s, the focus was on taming inflation, while more recent efforts have shifted towards preventing deflation and promoting growth.
While the Fed’s effectiveness in stimulating the economy can be debated, the S&P 500 has shown resilience even during periods of high interest rates, such as the late 1980s and the recent era of 20-year highs. Our final chart displays the daily closes of the 10-year yield against the S&P 500, with notes on Fed interventions.
For more frequent updates, we provide a Treasury Yield Snapshot on a bi-weekly basis.
ETFs associated with Treasuries include: Vanguard 0-3 Month Treasury Bill ETF (VBIL), Vanguard Intermediate-Term Treasury ETF (VGIT), and Vanguard Long-Term Treasury ETF (VGLT).
Originally published at Advisor Perspectives
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