Why 10-Year Treasury Yields Surged: Carolin Pflueger on Bond Risk

Key Takeaways

• University of Chicago economist Carolin Pflueger found that expected bond returns move directly with the correlation between stocks and bonds.
• Between 1985 and 2015, roughly 25% of the total drop in the 10-year Treasury yield happened because bonds became reliable hedges against stock market crashes.
• Between 2020 and 2025, the spike in 10-year Treasury yields was driven primarily by Treasuries turning stock-like, not by unanchored inflation expectations.
• Research with Matteo Iacoviello and Adi Sunderam shows investors demand higher risk premia when bonds drop at the same time equities drop.

Why Safe Assets Stopped Acting Safe

For three decades, holding US Treasuries felt like free portfolio insurance. When equities tumbled, bonds gained value. That dynamic allowed the US government and corporate borrowers to access cheap capital for decades.

Pflueger examined this historical shift alongside Matteo Iacoviello and Adi Sunderam. Their empirical research confirmed that Treasury yields dropped steadily from the mid-1980s through 2015 in part because bonds acted as dampeners during equity selloffs. As Pflueger put it: “what we find is that roughly maybe a quarter of the decline between the mid-'80s and 2010s in the 10-year yield was due to Treasury bonds becoming better hedges, the other part being, among other things, inflation expectations went down.”▶ 35:11

After 2020, that insurance policy evaporated. Treasuries began falling on the exact same days that technology stocks sank. Pflueger points out that when an asset stops hedging your downside, its price has to drop: “So if I look at the past 5 years, what has changed, I think, is that Treasury bonds have become a lot riskier. That's the bond-stock comovement that I just talked about that has gone up a lot.”▶ 30:22

Risk Premia Over Runaway Inflation

Many commentators assumed the surge in long-term yields after 2020 stemmed from bond markets panicking about permanent, runaway inflation. Pflueger's model shows a different mechanism: term premia expanded because the correlation turned positive.

When bonds and equities fall together, buyers require extra yield just to stomach the duration risk. Pflueger explained the core market dynamic plainly: “And if you think about any sort of basic investment logic, if an asset is risky, investors should not be willing to pay as much for it, or said differently, investors should require a higher return to compensate for holding this risk.”▶ 30:36

Her data reveals that this risk repricing explains the post-2020 bond selloff far better than pure inflation models. Pflueger noted: “And what we find is that the expected return that's priced in bond markets actually moves quite closely with bond-stock comovements in the data.”▶ 32:17 She added: “But over the past 5 years, or let's call it 2020 through 2025, the increase in the 10-year yield was really the majority was you can explain with changes in bonds becoming more stock-like.”▶ 35:35

Because the structural hedge broke, yields reset to multi-decade highs. For founders and capital allocators, this means the era of artificially suppressed discount rates is over until bonds regain their anti-stock behavior.

What to Do With This

Audit your startup cash management account this week. If your treasury policy holds long-duration debt funds under the assumption that they will protect your principal during an equity downturn, shift those reserves into short-dated Treasury bills under six months. Do not accept duration risk without getting paid for equity-like volatility.