10-Year U.S. Treasury Yield Drops Below 4% Amid Stagflation Fears After Producer Price Shock

The 10-year U.S. Treasury yield declined to 3.96% on Friday, dipping below the 4% threshold for the first time since December 2023. This move came amid heightened market anxiety triggered by a stronger-than-projected increase in producer prices, which rose 0.7% month-over-month in January, exceeding economists’ expectations of a 0.5% rise. The core PPI, which excludes food and energy, climbed 0.6%—a significant acceleration from the prior month’s 0.3% gain. The surge in wholesale inflation has reignited fears of a stagflationary scenario—where economic stagnation coexists with persistent inflation. With consumer inflation still above the Federal Reserve’s 2% target and labor market data showing signs of softening, the latest PPI report complicates the central bank’s policy path. Markets now price in a higher probability of rate cuts later in 2026, despite the inflationary pressures. Bond traders are shifting positions rapidly, driving a notable flattening of the yield curve. The 2-year Treasury yield declined to 4.11%, while the 30-year yield dropped to 4.33%, reflecting growing demand for long-dated debt as investors seek refuge from near-term rate uncertainty. The move also impacted equity markets, with the S&P 500 closing 0.8% lower, as technology and growth stocks came under pressure due to the rising cost of capital. The repricing of risk underscores a fragile macroeconomic environment. While consumer price inflation remains sticky, weaker manufacturing data and slowing job growth suggest the economy may be losing momentum. This duality—high inflation amid sluggish growth—has made the Federal Reserve’s next move increasingly uncertain, with markets now pricing in two rate cuts by year-end, down from three earlier in the month.