What a yield is made of
Expected rates, expected inflation, and a premium for everything that could go wrong in between.
The 10-year on 30 Sep 2026, 5.29%, split two ways · the expected path is the 10-year less the Kim–Wright term premium (THREEFYTP10); the real yield is DFII10, breakeven inflation T10YIE · FREDThe 10-year split two ways, 30 Sep 2026 · FRED
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Builds on note 1.2, Why the 10-year. Every term is defined where it first appears, and the words this note defines are collected at the end.
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01 what a yield is made of
What a yield is made of.
Expected rates, expected inflation, and a premium for everything that could go wrong in between.
Two ways to lend for ten years
You have money to lend to the government for ten years. Two ways:
| A: lock in for ten years | B: lend overnight, again and again | |
|---|---|---|
| how it works | buy a 10-year note once | lend for one night, get repaid, lend again the next day, every day for ten years |
| what you earn | the 10-year yield, fixed for ten years | whatever the Fed’s overnight rate turns out to be each day |
| what you know today | everything you will earn | only today’s rate |
| the risk | stuck with the old rate if rates rise (note 1.1) | your income rises and falls with the Fed |
Which is better depends on the Fed’s overnight rate over the next ten years:
| if the overnight rate averages this over ten years… | A pays | B pays | the better choice |
|---|---|---|---|
| 3% | 5.29% | about 3% | A |
| 5.29% | 5.29% | about 5.29% | neither: a tie |
| 6% | 5.29% | about 6% | B |
Now every lender faces the same choice. Say they start expecting the overnight rate to average 6%, above the 10-year. The 10-year note:
| step | what happens |
|---|---|
| one | lending overnight (B) now looks better than locking in at 5.29% (A) |
| two | so fewer people want to buy 10-year notes |
| three | anyone selling one has to lower the price to find a buyer: holders of old notes, and the government at its auctions, where bidders now offer less |
| four | the price falls until a buyer earns about 6% a year: about $948 for a $1,000 note that pays $52.90 a year |
| five | that 6% is now the note’s yield. The payments never changed; the lower price raised the yield |
If lenders expect less than the 10-year pays, the reverse: they rush to lock in, bid the price up, and the yield falls. Either way the 10-year settles at roughly the average overnight rate lenders expect over the next ten years: the expected path of the short rate (the overnight rate the Fed steers).
Choice A carries a risk B doesn’t: being stuck. So lenders ask a little extra to lock in, in case rates or inflation turn out higher than expected: the term premium.3
10-year yield ≈ expected average short rate, next ten years + term premium
In plain words, a forecast and a bonus:
| part | in one line | everyday version | what moves it |
|---|---|---|---|
| expected path | the average overnight rate lenders expect over the next ten years | a forecast: where lenders think the Fed’s rate is heading | news about the Fed, jobs and inflation |
| term premium | extra pay for locking money up for ten years | the bonus a fixed-term deposit (a CD) pays over a savings account, because you can’t touch the money | uncertainty: wars, swinging inflation, a flood of new government bonds |
| the 10-year yield | the two added up | – | either part |
So a speech that makes lenders expect hikes moves the expected path; a war that makes the future harder to see moves the term premium.
Today:
| part | on 30 September 2026 |
|---|---|
| the expected path: the average short rate lenders expect | 4.27% |
| the term premium: extra pay for being stuck | 1.02 points |
| the 10-year yield | 5.29% |
A catch: no bond is labelled “term premium”, so it can’t be seen directly. It is estimated with a model, a set of equations fitted to past yields. This notebook uses the estimate of Kim and Wright, two Fed economists, which the Fed publishes.3 Other models put its level elsewhere: read the level as rough and the changes as the signal. The expected path is the 10-year minus that estimate.
Inflation: why a dollar later buys less
A second way to split the same yield starts with prices. Inflation is prices rising across the economy, so each dollar buys a little less each year. The US usually measures it with the consumer price index, or CPI: the cost of a fixed basket of everyday things such as food, rent, fuel and haircuts. If the basket costs 3% more than a year ago, inflation is 3%.
Lenders are repaid in dollars, and dollars lose buying power. Lend at 4% for a year while prices rise 3%: you get 4% more dollars, each buying 3% less, so you can buy only about 1% more. That 1% is the real return, the gain in buying power; the 4% is the nominal return, in plain dollars.
| the example | today’s 10-year | |
|---|---|---|
| what the note pays in plain dollars (the nominal yield) | 4% | 5.29% |
| inflation the lender expects | 3% | 2.36% |
| what the lender really gains in buying power (the real yield) | about 1% | 2.93% |
So every nominal yield is a real return plus pay for expected inflation. A real return can be below zero, when a note pays less than inflation. The 10-year real yield was below zero for stretches in 2011–13 and 2020–22, reaching −1.19% in August 2021: lenders gave up buying power for the safety of a US government note.1
How the market reveals expected inflation
Alongside the ordinary 10-year note, the Treasury sells TIPS (Treasury Inflation-Protected Securities), whose face value rises with the CPI. Their payments keep their buying power, so their yield is a real yield:
| an ordinary 10-year note | a 10-year TIPS | |
|---|---|---|
| face value | fixed at $1,000 | rises with prices: if prices rise 3% in a year, it rises 3% |
| yearly interest | fixed dollars | rises with the face value |
| what inflation does to it | eats into it: each dollar buys less | nothing: the payments keep their buying power |
| its yield, on 30 September 2026 | 5.29% in plain dollars (nominal) | 2.93% on top of inflation (real) |
The gap, 2.36%, is the breakeven inflation rate: the average inflation over the next ten years at which both notes pay the same:
| if inflation over the next ten years averages… | which note does better |
|---|---|
| more than 2.36% | TIPS: its payments grow with prices |
| exactly 2.36% | neither; they come out equal |
| less than 2.36% | the ordinary note |
Lenders expecting more inflation buy TIPS; those expecting less buy ordinary notes. Their trading settles the gap at roughly the inflation the market expects: the breakeven is the market’s own inflation forecast.4
Easy to mix up: a TIPS has a face value and a price, set by different things:
| what sets it | does a rush of buyers change it? | |
|---|---|---|
| its face value | the actual CPI: the Treasury raises it by however much prices really rose | no; only real price rises move it |
| its price | buyers and sellers in the market, every day | yes |
Suppose everyone suddenly expects much higher inflation, and lenders switch from ordinary notes to TIPS:
| what lenders do | price | yield | |
|---|---|---|---|
| TIPS | rush to buy | up | down (higher price, lower yield) |
| the ordinary 10-year | sell, to switch | down | up |
| the gap between the two yields: the breakeven | – | – | wider: up |
The breakeven rises before shop prices change: it moves on expected inflation, which makes it a forecast.
10-year yield = real yield (TIPS) + breakeven inflation
Not a perfect one: the breakeven also carries a little pay for the risk that inflation surprises, and a small discount because TIPS are harder to trade than ordinary notes.
Two ways to split the same number
So one yield splits two ways, each answering a different question:
| split | the two parts today | adds up to | the question it answers |
|---|---|---|---|
| expected path + term premium | 4.27% + 1.02 | 5.29% | how much is about where the Fed is heading, and how much is pay for being stuck? |
| real yield + breakeven | 2.93% + 2.36% | 5.29% | how much is a real return, and how much is pay for expected inflation? |
FIG 1 draws both splits since 2003; the buttons switch between them.
What moved this year
Last year and this year, part by part:
| 30 Sep 2025 | 30 Sep 2026 | change | |
|---|---|---|---|
| the 10-year yield | 4.16% | 5.29% | up 1.13 points |
| the breakeven (expected inflation) | 2.36% | 2.36% | no change |
| the real yield (TIPS) | 1.80% | 2.93% | up 1.13 points |
| the expected path | 3.66% | 4.27% | up 0.61 points |
| the term premium | 0.50 | 1.02 (latest, 25 Sep) | up 0.52 points, roughly doubled |
On the real + inflation split, the whole rise was in the real yield: expected inflation didn’t move, and the real yield reached its highest since November 2008. On the expected path + premium split, the rise was about half lenders expecting the Fed’s rate to stay higher and about half a bigger term premium.134
Why didn’t the breakeven move, with oil up and inflation at 3.4%?
It is the average inflation expected over the next ten years, not this year’s. An oil burst that lenders expect the Fed to bring down barely moves a ten-year average; note 1.4 shows why they seem to expect that.
Isn’t the real yield just keeping up with inflation?
No: that would show in the breakeven, the inflation part. A rising real yield means money itself costs more.
Both splits tell one story: the rise was in the real part, from lenders expecting a firmer Fed and wanting more to lock in.
So the market is not mainly pricing more inflation. It is charging more for money in real terms, and more to lock it up for long.
Why is the market charging more for money?
Two readings. A higher real yield fits a strong economy that the Fed must keep from overheating; its 16 September statement said “productivity growth is strong, and capital investment is robust.”9 (Productivity is output per hour of work; capital investment is firms’ spending on buildings, machines and equipment.) But a higher real yield and a bigger term premium also fit lenders wanting more pay to absorb a flood of new government bonds, or for not knowing where rates are going. Note 1.4 tells them apart.
02 the words
The words in this note.
Every term this note defines, in the order it appears.
| word | what it means |
|---|---|
| short rate | The overnight rate the Fed steers. |
| real yield | The return once inflation is taken out: what a lender gains in buying power. |
| nominal yield | A yield counted in plain dollars, before inflation is taken out. |
| expected path | The average short rate lenders expect over the years ahead; the 10-year minus the term premium. |
| TIPS | Treasuries whose face value rises with prices, so their yield is a real yield. |
| breakeven | An ordinary yield minus a TIPS yield: the inflation the market expects, give or take a premium. |
| model | A set of equations fitted to past data, used to estimate something that can’t be seen directly. |
| productivity | Output per hour of work. |
| capital investment | Firms’ spending on buildings, machines and equipment. |
Every term in the notebook, with the note that explains it, is in the notebook’s glossary.
sources read 2026-10-01
hover, tap or focus · every number above is in here
Sources · 4 references
Every series was downloaded from FRED on 1 October 2026 (unadjusted CPI on 2 October), and the filings from EDGAR the same day; both are kept as a snapshot with the post. Every number on the page is computed from that snapshot or quoted from the sources below. Each source is marked peer-reviewed or not. Nothing here is advice: the post explains; it does not recommend.
- Board of Governors of the Federal Reserve System (2026). Selected Interest Rates (H.15): market yields on US Treasury securities at constant maturity, 1-month to 30-year (DGS1MO … DGS30), 10-year TIPS (DFII10), the federal funds target range (DFEDTARL, DFEDTARU; DFEDTAR before 2008) and the effective rate (FEDFUNDS); the broad dollar index (DTWEXBGS, H.10). Retrieved from FRED, Federal Reserve Bank of St. Louis, 1 October 2026. Data, not peer-reviewed. fred.stlouisfed.org/series/DGS10
- Kim, D.H. and Wright, J.H. (2005). An arbitrage-free three-factor term structure model and the recent behavior of long-term yields and distant-horizon forward rates. Finance and Economics Discussion Series 2005-33, Federal Reserve Board. The model behind the term premium used here; the Fed’s updated estimate is FRED’s THREEFYTP10. A working paper, not peer-reviewed. federalreserve.gov/pubs/feds/2005/200533
- Federal Reserve Bank of St. Louis (2026). 10-year breakeven inflation rate (T10YIE): the 10-year Treasury yield minus the 10-year TIPS yield. FRED, retrieved 1 October 2026. Data, not peer-reviewed. fred.stlouisfed.org/series/T10YIE
- Federal Open Market Committee (2026). Federal Reserve issues FOMC statement, 16 September 2026. The 25-basis-point increase to 3.75–4.00%, the 12–0 vote, and the quoted assessment of productivity and investment. Not peer-reviewed. federalreserve.gov/newsevents/pressreleases/monetary20260916a
To verify before publication: Costco’s 30 September close against Koyfin. Checked against their own pages on 2 October 2026: the FOMC statement of 16 September 2026, the BLS releases for August 2026, the Treasury’s statements of 2 August and 1 November 2023, the Bank of England’s case study, the Federal Reserve History essay, and every series against a fresh recomputation. Not sourced, and so not stated as numbers: the market-implied odds of a hike, and the average maturity of the government’s debt.
documentation
- FRED: the 10-year Treasury yield (DGS10): The series the post is about, daily since 1962, from the Fed's H.15 release.
- TreasuryDirect: marketable securities: What bills, notes and bonds are, and how long each lends for.
- the Federal Open Market Committee: Where the Fed sets the federal funds rate: its meetings, statements and projections.
- TreasuryDirect: TIPS: Treasury Inflation-Protected Securities, whose yield is a real yield.
- the Kim–Wright term structure model: The Fed's page for the model and its published term premium estimates.