TREASURY NOTE SPREAD OVER INFLATION (CPI) 1960 – 2021 10% 8% Spread (1% ...
Spread (1% = 100 bps)
10%
8%
6%
4%
2%
0%
-2%
-4%
-6%
TREASURY NOTE SPREAD OVER INFLATION (CPI)
1960 ¨C June 2024
Avg = 2.0%
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020
10-Yr Treasury Note Minus Inflation (CPI)
DECADE
1960s
1970s
1980s
1990s
2000s
2010s
2020s
SPREAD
AVERAGE
2.3%
0.3%
4.8%
3.5%
1.9%
0.6%
-1.5%
INFLATION (CPI)
AVERAGE
2.4%
7.1%
5.6%
3.0%
2.6%
1.8%
4.2%
BOND YIELDS: REASONABLE EXPECTATIONS
Although the average spread for Treasury notes over the inflation rate has been 2%, the
average consists of periods that were above the average and periods that were below the
average. Specifically, the 1960s reflected fairly modest inflation and a spread of 2.3%.
The inflation-infected 1970s surprised bond investors and they were slow to adjust their
required returns. By the 1980s, much like a battered insurance company that raises
premiums, the inflation spread rose to near 5.0% to adjust to the newly-realized inflation
risks. The current spread is 1.42%.
As Volker and Greenspan at the Fed maintained a campaign to tame and control inflation,
the bond market began to calm its demand for an inflation-risk premium. By the 1990s, the
inflation spread decined to 3.5%. For the 2000s, the spread averaged 1.9%. During the
ZIRP and QE period, the spread was forced into negative territory. Going forward, the
Powell Fed appears to be targeting inflation near 2% (although that commitment is
somewhat uncertain). By adding a 2% or so inflation-risk and term spread, a yield near 4%
may be just about right for the 10-year note.
For an extended period, the Fed is expected to sustain relatively high short-term interest
rates. Watch for reports about Conundrum II¡similar but opposite of the period in 2005
when long-term interest rates (yields) remained relatively lower as the Fed raised shortterm rates. As the Fed begins to lower rates, but with a conviction to control inflation, we
should not be surprised if bond yields stay flat or even rise a bit.
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