Stagflation Fears Rise as 10-Year Treasury Yield Surpasses 5%

The 10-year Treasury yield has surpassed 5% for the first time since 2007, raising concerns about a possible 'stagflation' scenario reminiscent of the 1970s. This milestone marks the culmination of a six-year surge from pandemic-era lows near 0.5%. The Federal Reserve is now facing a challenging situation where high inflation and weak economic growth coexist.

Economists have dubbed this phenomenon 'stagflation,' which was also observed during the Oil Crisis in the 1970s. However, the current situation does not come close to the extreme levels of inflation experienced back then, with the CPI peaking at around 14.8% in March 1980 compared to today's 3.4%. The Fed's response to stagflation was equally brutal, with Chairman Paul Volcker pushing the federal-funds rate to 20% by 1981 to combat inflation.

The 10-year Treasury yield is a measure of the return investors receive for holding U.S. government debt. The extraordinary monetary and fiscal responses to COVID-19, combined with high inflation in recent decades, the Federal Reserve's rate increases, federal deficits, and Treasury issuance have all contributed to this reversal.