The gap between stock yields and Treasury yields has narrowed to levels not seen since 2007, setting up a scenario that should have the Federal Reserve deeply concerned. Investors once flocked to equities for higher returns, but now the so-called equity risk premium has shrunk to a historic low, making government bonds a much more attractive option. This is the kind of setup that signals trouble.
The “yield“ on equities is at the lowest premium since 2007 vs the yield on treasuries. 👇🏼 pic.twitter.com/5rbPCfZMo8
— Kalani o Māui (@MauiBoyMacro) March 30, 2025
Stagflation—that dreaded mix of sluggish growth and persistent inflation—isn’t just a theoretical risk anymore. The data is pointing straight at it. GDP growth is cooling, consumer spending is weakening, and yet inflation refuses to back down. The Fed’s 2% target remains a distant dream. Core inflation is still running hot, wage pressures persist, and energy prices are volatile. If they keep rates high, growth slows further. If they cut too soon, inflation could surge back. This is the trap they walked into.
How long you think until the FED realizes they're fucked with stagflation?
Slowing growth with sticky inflation. pic.twitter.com/DxgUdNHdqO
— blake (@blakestonks) March 30, 2025
Equities are feeling the squeeze. The S&P 500’s earnings yield—the inverse of the price-to-earnings ratio—is barely outpacing the yield on 10-year Treasuries. That spread is supposed to compensate investors for the added risk of stocks, but at these levels, why take the gamble? Institutional money is already shifting. Bond yields are offering safety without the headache of market volatility.
The last time this happened, we were on the doorstep of the Great Recession. Back then, the Fed had room to cut rates aggressively. Not this time. With inflation still simmering, Powell and company are stuck in a no-win situation. Either they tighten too hard and crash the economy, or they pivot and risk an inflationary spiral. At some point, they will have to choose.