‘It’s Just Going From One Pocket to the Other’: Chicago Fed Scholar on Why the 30-Year Pays 5.63%

Bloomberg’s Joe Weisenthal put the market’s favorite theory to his guest flat out on Odd Lots. Are yields rising “straightforwardly because they’re issuing so many of them?” Carolin Pflueger said supply is “very simple” in her framework: “We’re all taxpayers and to the extent that we’re also holding bonds, it’s just going from one pocket to the other.”

Pflueger is an associate professor at the University of Chicago Harris School and a resident scholar at the Chicago Fed. She was speaking about her own research, and her comments do not represent the Fed’s views.

Her answer matters because of where rates sit. On October 2, the 10-year Treasury yielded 5.3% and the 30-year paid 5.63%. A week and a half earlier, CNBC’s Fast Money ran the headline “U.S. 10-Year Yield Hits 19-Year High.” Paul Christopher of Wells Fargo (NYSE:WFC | WFC Price Prediction) told CNBC that higher yields partly reflect compensation for competing bond issuance. If you build your portfolio around that story, you are protecting yourself from the wrong risk.

Why Pflueger’s Explanation Holds Up Better Than the Supply Story

Her verdict is right. The logic is the old economic idea called Ricardian equivalence. Every new Treasury bond is a future tax bill. The households paying those taxes are, through pensions, 401(k)s and money funds, the same households holding the bonds. Extra borrowing moves money between your left pocket and your right pocket.

Research by Pflueger and co-authors finds that the majority of the rise in the 10-year yield from 2020 to 2025 came from bonds becoming more stock-like. Changes in long-term inflation expectations explain much less.

Treasury data supports that. The 30-year inflation-protected yield sat near 3.3%. Strip that out of the 5.63% nominal yield and the market is pricing roughly 2.3% annual inflation over three decades. That sits close to the Fed’s 2% target. Most of the 30-year’s yield is real compensation for risk.

Pflueger pins down what that risk is: “There is actually something about the co-movement with the stock market which would suggest that these bond risks are at least to a first order priced against the stock market.” Bonds that fall when stocks fall are no longer insurance. Investors demand a higher yield to hold them.

Your Bonds’ Behavior in a Crash Decides the Outcome

The variable that matters is whether your bonds rise or fall when stocks drop. Take an sample $500,000 portfolio split 60/40, then hit stocks with a 20% decline. The stock side loses $60,000.

Say bonds act as a hedge and gain 5%. That adds $10,000, so the net loss is $50,000, or 10%.

Now say bonds move with stocks and fall 5%. The loss grows to $70,000, or 14%. The portfolio and the crash are identical. The only change is the sign on the bond move.

Long-duration holders have already lived through the bad version. Jared Woodard of Bank of America (NYSE:BAC) told Barron’s that the “20-plus year treasury bond ETF is down 40% since the summer of COVID.”

A 30-year bond that moves like a stock still pays its coupon. An sample $10,000 Treasury bought at 5.63% and held to maturity pays $563 a year no matter what its price does. Pflueger’s point is about what bonds do for you in a crash. The coupon continues paying even though the crash protection has worn off.

How to Rebuild Your Hedge While Long Bonds Act Like Stocks

1. Look up your bond fund’s duration. Duration roughly tells you the percentage price drop for each one-point rise in yields. A fund with a duration of 15 loses about 15% if rates climb a point. That is equity-sized risk sitting in your “safe” bucket.
2. Run the 20% crash test on your own balances. Plug in your actual stock and bond dollars. Model one case where bonds gain 5% and one where they lose 5%. That difference is the protection you may no longer have.
3. Continues income and insurance in separate buckets. Individual Treasuries held to maturity can lock in income. For crash protection, short-term bills carry little price risk. The 1-month bill yielded 4%, so the safer bucket still pays.
4. Plan home purchases around current rates. The average 30-year mortgage hit 7.3%, the highest reading in a year. If supply is a wash, slower deficit growth will not bring that rate down. Finance the purchase at today’s rate and treat any later refinance as a bonus.

You get paid 5.63% on the long bond because it now acts like a stock, so treat it as one when you size your safety net.

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