Inflation, Not Growth, Is the Issue—For Now

Oil-driven inflation fears have investors increasingly convinced the Fed won’t be cutting interest rates anytime soon—a sentiment shift that’s pushed bond yields higher recent weeks.

Meanwhile, however, a key market indicator tied to the economic outlook has remained firm: the real yield on the 10-year Treasury note, up 43 basis points since the war with Iran began in late February (see the chart). As the name suggests, real yield reflects a bond’s nominal interest rate minus the expected rate of inflation. The real yield is observed directly from the yield on a Treasury Inflation Protected Security (TIPS) of the same duration.

Since the yield strips out inflation expectations, the 10-year Treasury’s real yield reflects expected Fed policy over that maturity plus a “term premium”, which is essentially extra compensation investors demand from the bond to compensate for the risk they’re taking. These risks include uncertainty around Fed credibility, economic growth, and broader risk sentiment.

Currently, the Fed is stuck: Rate cuts could fuel higher inflation, while rate hikes could hurt economic growth. This 43 basis point rise in the 10-year Treasury’s real yield is roughly equal to the market’s expected Fed policy path, meaning the term premium component of this yield is relatively unchanged. Overall, this looks like a higher-for-longer repricing that’s driven by inflation, but without an increase in macro uncertainty or risk aversion.

Going forward, we’ll be watching the 10-year real yield carefully for signs that investors are becoming worried about future economic growth prospects. For now, the rising real yield does not suggest economic growth risks. But if that real yield falls significantly, it would signal a flight to safety from those fears.

Authored by Mike Dickson, Ph.D.

Originally posted on Horizon Investments.

For more news, information, and analysis, visit the ETF Strategist Content Hub.

References to indices, or other measures of relative market performance over a specified period of time are provided for informational purposes only. Reference to an index does not imply that any account will achieve returns, volatility or other results similar to that index. The composition of an index may not reflect the manner in which a portfolio is constructed in relation to expected or achieved returns, portfolio guidelines, restrictions, sectors, correlations, concentrations, volatility or tracking error targets, all of which are subject to change. It is not possible to invest directly in an index. Information obtained from third party sources is believed reliable but has not been vetted by the firm or its personnel.

This commentary is written by Horizon’s asset management team. Past performance is not indicative of future results. Nothing contained herein should be construed as an offer to sell or the solicitation of an offer to buy any security. This report does not attempt to examine all the facts and circumstances that may be relevant to any company, industry, or security mentioned herein. We are not soliciting any action based on this document. It is for the general information of clients of Horizon Investments, LLC (“Horizon”). This document does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Before acting on any analysis, advice, or recommendation in this document, clients should consider whether the security in question is suitable for their particular circumstances and, if necessary, seek professional advice. Investors may realize losses on any investments. Asset allocation cannot eliminate the risk of fluctuating prices and uncertain returns. All investing involves the risk of loss.

The investments recommended by Horizon are not guaranteed. There can be economic times when all investments are unfavorable and depreciate in value. Clients may lose money. This commentary is based on public information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied on as such. The opinions expressed herein are our opinions as of the date of this document. These opinions may not be reflected in all of our strategies. We do not intend to and will not endeavor to update the information discussed in this document. No part of this document may be (i) copied, photocopied, or duplicated in any form by any means or (ii) redistributed without Horizon’s prior written consent. Forward-looking statements cannot be guaranteed. Other disclosure information is available at www.horizoninvestments.com.

Horizon Investments is a registered trademark of Horizon Investments, LLC

©2026 Horizon Investments, LLC.