This article looks at the 10-year Treasury yield's historical trends since 1962, exploring its relationship with key economic indicators like the Fed Funds Rate (FFR), inflation, and the S&P 500.
The 10-year Treasury yield has experienced dramatic fluctuations, ranging from a peak of 15.68% in October 1981, during the height of the Volcker era, to a historic low of 0.55% in August 2020, amidst the economic uncertainty of the pandemic. As of February 28, 2025, the weekly average stood at 4.31%.
The stagflation crisis of the late 1970s and early 1980s demanded drastic measures. Under the leadership of Paul Volcker, the Federal Reserve pushed the FFR to a historic high of 20.06% in January 1981. This aggressive tightening of monetary policy was instrumental in curbing runaway inflation, albeit at the cost of a significant economic slowdown.
In stark contrast, the FFR was driven to near-zero levels in the aftermath of the 2008 financial crisis and again during the economic turmoil of the 2020 pandemic. Specifically, the FFR reached a record low of approximately 0.04% in May 2020. These periods of ultra-low interest rates aimed to stimulate borrowing, investment, and economic recovery.
Treasuries vs. Equities
Now let's overlay the S&P 500 to see the historical pattern of equities versus Treasury securities. The initial chart presents nominal values, meaning it doesn't account for inflation. This can create a misleading picture of the actual purchasing power of yields and equity returns.
Here's the same chart with the S&P 500 and 10-year yields adjusted for inflation using the Consumer Price Index (CPI). By adjusting the data for inflation, we gain a clearer understanding of the real returns. This adjustment reveals the severe impact of stagflation, particularly the significant decline in real equity values from the mid-1960s to 1982. Additionally, notice the more recent impact over the past few years when inflation reached its highest level in 40 years. We can also see why high yields can be deceptive in periods of elevated inflation.
The FFR line offers valuable insights into the Federal Reserve's monetary policy. We can see how the Fed has used rates to control inflation, accelerate growth and, when needed, apply the brakes. I've annotated the top chart with the tenures of the Fed chairmen so we can see who was managing the various 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 capacity to implement dramatic policy shifts in response to prevailing economic conditions. In the early 1980s, the priority was taming inflation, while in the more recent periods, the focus shifted to preventing deflation and promoting economic growth.
It's not obvious that the Fed has done a great job stimulating the economy. However, even during periods of high interest rates, such as the late 1980s and the recent period of rates being at a 20 year high, the S&P 500 has demonstrated resilience and achieved record highs.
Now let's see the 10-year against the S&P 500 with some notes on Fed intervention.
The next chart is based on daily data and adds some additional Treasury maturities for a close look at yields since 2007.
