Yardeni: Productivity Will Suppress Inflation, 5% Yield Makes 10-Year Treasuries Attractive
nashnova research
Wall Street strategist Ed Yardeni called ten-year Treasury yields near 5% "very attractive," arguing that sustained productivity gains will hold inflation at 2%–2.5% — delivering a real return of roughly 2.5% and signaling a return to pre-financial-crisis pricing norms in the bond market.
Why does he call 5% yields "attractive"?
Yardeni expects inflation to average 2%–2.5% over the next decade. At a 5% yield, that leaves a real return of roughly 2.5%.
This means → after stripping out inflation, bondholders still pocket about 2.5 percentage points a year — a solid deal by fixed-income standards.
The catch: this only works if productivity keeps rising fast enough to hold inflation down. That assumption is the make-or-break variable.
Why is productivity the core bet?
Yardeni's logic chain: rising productivity → lower unit costs → suppressed inflation → positive support for real interest rates.
In plain terms = if workers and machines produce more per hour, companies don't need to raise prices to protect margins, so prices rise slowly.
This reflects deep optimism about U.S. supply-side capacity. If productivity stalls or declines, inflation runs hotter than expected — and 5% may not be enough to compensate for the risk.
Why have Treasuries rallied over the past two days?
The immediate trigger: a Democratic sweep in the U.S. midterm elections. Markets expect this to check the Trump administration's tax-cut and spending plans.
This means → fiscal-expansion expectations shrink → projected Treasury supply growth slows → bond prices rise, yields fall.
Yields across maturities dropped at least 4 basis points; the ten-year benchmark fell to 4.87%, the lowest since September 10.
What does rate "normalization" mean?
Yardeni sees current rates as having "returned to a longer-run normal." He expects the ten-year yield to trade in a 4%–5% range.
In plain terms = the near-zero-rate era of the past decade-plus is over. Today's rates look more like the norm before the 2008 financial crisis.
For investors: bonds once again offer a real positive return — but the same shift puts more pressure on richly valued equities that relied on ultra-low rates to justify their prices.
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