For years, a 5% yield on the Treasury looked like a relic from another interest-rate era—where borrowers faced soaring loan rates. Now it’s back, capping a six-year surge from pandemic-era lows near 0.5%. The benchmark yield crossed 5% this month for the first time since 2007, but this appears different than the eve of the Great Recession: the Fed is staring down a lose-lose situation combining high inflation and weak economic growth, a catch 22 that economists termed “stagflation” in the 1970s and long feared through the 10-year’s climb upward since the pandemic.
The last time the U.S. experienced this mix of trends — called “stagflation” by economists — was in the 1970s, during the Oil Crisis—and it took years for markets to digest the paradox of higher inflation, requiring higher interest rates, and weak economic growth, needing the opposite.
“We’re certainly in a stagflationary period,” famed investor Ray Dalio told CNBC in April. “How that transpires has a lot of parts to it, but we’re certainly in that.”
But to be clear, today doesn’t come close to the stagflation crisis in the 70s. Inflation peaked near 14.8% in March 1980, more than four times today’s 3.4% rate, and unemployment topped 9% during the mid-decade oil shock, versus roughly 4.1% now. The Fed’s response was proportionally brutal, too: Chair Paul Volcker pushed the federal-funds rate to 20% by 1981 to break inflation’s back, triggering a recession that pushed unemployment above 10%—a scale of pain nowhere near today’s range.
The 10-year Treasury yield is the return investors get for holding the U.S. government’s debt—and extraordinary monetary and fiscal response to COVID, the worst inflation in decades, the Federal Reserve’s rate increases, federal deficits and Treasury issuance and the shocks of tariffs, energy prices and Iran have all played a role in this reversal.
Where it started
In 2020, as COVID spread across the country and the world, investors rushed toward safety in the form of government debt and the Fed slashed its benchmark interest rate to near zero. The Fed also purchased large amounts of Treasury and mortgage securities. The yield fell to 0.52% in 2020, the lowest level on record.
At the time, the combination of weak economic activity and exceptionally low interest rates produced a world where investors could expect very little income from government bonds. But it all changed when the economy reopened.
The U.S. government deployed trillions of dollars in fiscal support, with households accumulating savings—and customers shifted spending from services to goods. All at the same time, factories, ports and transportation networks struggled to keep up with the rebounding demand.
The turning point
The Consumer Price Index began to climb quickly in 2021. Federal Reserve officials had initially called the increase as temporary, noting supply constraints and the reopening economy. Former Fed Chair Jerome Powell said in an August 2021 speech he expected the inflation to slow.
“Inflation at these levels is, of course, a cause for concern,” Powell said. “But that concern is tempered by a number of factors that suggest that these elevated readings are likely to prove temporary.”
But by the second half of the year, the Fed’s language changed. In September 2021, the Federal Open Market Committee said inflation was elevated, even though it still posited many of the factors were transitory. The Fed kept its federal-funds target at 0% to 0.25%.
But by December, policymakers changed expectations. The Fed’s median projection showed the federal funds rate rising to 4.4% by the end of 2022, 5.4% in 2023 and 4.4% in 2024, compared with the 0.1% rate at the end of 2021.
Inflation forced the Fed’s hand
CPI inflation reached 9.1% in June 2022, the highest 12-month increase since 1981.
Energy prices were also a major contributor, with the energy index up 41.6% from a year earlier. The Fed also began hiking rates in March 2022. It lifted the federal-funds target range to 5.50% by July 2023.
Due to the rising rates, from around 1.5% at the end of 2021, the 10-year yield climbed above 4% in 2022 and eventually flirted with 5% in 2023. And in October 2023, the yield crossed 5% intraday. But it did not stay there—the yield fell as investors anticipated that inflation would drop and the Fed would begin cutting rates. Even the S&P 500 dropped 19%, its worst since 2008.
Then Trump, tariffs and war
Then came the presidential election. After Donald Trump won in 2024, the 10-year yield jumped as investors anticipated his economic agenda would produce larger deficits, higher tariffs and potentially more inflation.
The 10-year yield rose up to 4.7% in 2024, with investors pricing in the possibility that tax cuts and other policies would increase government borrowing—and tariffs can raise prices.
And tariff shock. Trump announced sweeping tariffs in 2025, and investors initially rushed to the Treasury from recession fears. But that didn’t last long. The 10-year yield jumped to 4.79% at one point.
According to a report from Reuters, the market’s movements raised concerns from investors about liquidity in the roughly $29 trillion Treasury market.
Now the latest leg of the Treasury selloff is tied to energy. The Iran war has disrupted energy markets and pushed oil prices higher—threatening economic growth, with the oil-price shock raising inflation.
Reuters reported that Treasury yields reached its highest levels since 2007 in September as oil prices moved above $100 a barrel and investors worried about inflation. By August, U.S. CPI inflation was running at 3.4% annually, well above the Fed’s 2% target. Gas prices rose 3.9% in August alone, accounting for more than one-third of that month’s increase in the overall CPI.