Line graph compares the yield of the 10-year U.S. Treasury Note with inflation.
Y-axis: Yield/inflation rate (%); X-axis: 1962 – 2022
Inflation as measured by the Consumer Price Index (CPI) opens the period just below 2%, while the 10-year U.S. Treasury Note opens just above 4%. Generally the Treasury note outperforms inflation as measured against CPI, however there have been several recent times when that has not been the case. In 1974-1975 inflation reached 12% while the Treasury note was near 8%, and again in 1980, inflation outpaced the Treasury note (above 14% vs. about 10% for the note). From 1983 to 2005 the note consistently returned more than inflation, but the spread narrowed from about 10% to about 5% (1995) to just under 4% (2000). Since 2005 the two measures have been closely engaged, with inflation frequently exceeding the note for brief periods. At the end of August 2022, inflation stood at 8.3% while the Treasury note was at roughly 3.8% at the end of September.
Line graph tracks the five- and 10-year breakeven inflation rates.
Y-axis: Inflation rate (%); X-axis: 2003-2022.
Breakeven rates generally track each other closely between 1% and 3%. The most notable exception occurred in late 2008, when the five-year breakeven rate declined sharply from over 2.6% to -2.24% while the 10-year breakeven rate declined from about 2.5% to 0.33%. Another sharp decline occurred in March 2020, when the 10-year breakeven rate fell from about 1.65% in late January to about 0.9% in late March. During the same time period the five-year rate fell from about 1.6% to about 0.5%.
As of Q3 2022, the 10-year rate had risen to about 2.15% and the five-year rate was near 2.14%.
Sources: Bloomberg and Wells Fargo Investment Institute. 10-year U.S. Treasury note: monthly data from January 1, 1962 to September 30, 2022. CPI: monthly data from January 1, 1962 to August 31, 2022. 5 and 10 year breakeven inflation rates: monthly data from January 1, 2003 to September 30, 2022. For illustrative purposes only. Yields represent past performance and fluctuate with market conditions. Current yields may be higher or lower than those quoted above. Past performance is no guarantee of future results. Consumer Price Inflation (CPI) measures the price of a fixed basket of goods and services purchased by an average consumer. Although Treasuries are considered free from credit risk they are subject to other types of risks. These risks include interest rate risk, which may cause the underlying value of the bond to fluctuate.
- Real yields on 10-year U.S. Treasury bonds remain in negative territory as actual inflation readings remain elevated. Also, inflation expectations still remain above the Federal Reserve’s long-term target of 2%.
- In the long run, to earn positive yields above the level of inflation (real yield) — depending on risk tolerance — we think investors should consider high-yield and emerging market debt as well as dividend-paying equities.