The 10-year Treasury note is a debt obligation issued by the United States government with a maturity of 10 years upon initial issuance. A 10-year Treasury note pays interest at a fixed rate once every six months and pays the face value to the holder at maturity. The U.S. government partially funds itself by issuing 10-year Treasury notes. 

The benchmark U.S. Treasury yield rose to 1.662%  on April 9, 2021, after the March producer price index (PPI), showed a larger-than-expected increase. Economists and Federal Reserve officials have repeatedly warned that inflation data will show rising prices in the spring and summer months as the economy rebounds from the pandemic. Treasury yields moved rapidly moving higher earlier this year over concerns about inflation and the economic recovery from the coronavirus. The Federal Reserve has said it will let inflation run hotter if this helps achieve full employment.

What impact does all of this have on the stock market? Numerous studies have looked at the impact of inflation on stock returns. Unfortunately, the results of these studies are not conclusive. Most studies conclude that expected inflation can either positively or negatively impact stocks, depending on the investor's ability to hedge and the government’s monetary policy.

Unexpected inflation showed more conclusive findings. Studies showed a strong positive correlation to stock returns during economic decline. This demonstrates that the timing of the economic cycle is important for investors in determining the impact on stock returns. Finally, higher inflation was correlated with higher volatility in the stock market. 

Growth stocks are companies that are expected to grow sales and earnings at a faster rate than the market average.

Value stocks refers to shares of a company that trade at a lower price relative to its fundamentals. Growth stocks tend to be more negatively impacted by inflation than value stocks during periods of high inflation. Income stocks pay regular, often steadily increasing dividends. Most income stocks have lower levels of volatility than the overall stock market, and offer higher-than-market dividend yields. When inflation increases, purchasing power decreases. The impact of high inflation makes income stocks less attractive since dividends tend to not keep up with inflation levels.

Bottom line, inflation will affect portfolio performance. In theory, stocks should provide some hedge against inflation, because a company's revenues and profits should grow at the same rate as inflation, after an adjustment period. However “in theory” is not the same as “reality.” Inflation's inconclusive impact on stocks muddies the waters and confuses the decision to trade, hold or to take new positions. Historically, in the U.S. market, there has been a correlation to high inflation and lower returns for the overall market in most periods.

Tickers to consider: AAU.V, SSVR.V, BYOC,  CEI, CURR, FRSX, JAGX, GBS, PPCB & TZA