Gap grows between 10-year Treasury yield and real 10-year interest rate
Source: Bloomberg Finance, L.P., as of November 17, 2021. Real 10-year interest rates reflect generic 10-year TIPS breakeven yield.
- Since October’s surprise inflation reading, which showed that inflation was running hotter and more broad-based than many had expected, rates across the yield curve have climbed notably. Shorter-term rates have seen the greatest jump, but long-term rates also resumed their upward trajectory.
- October’s inflation data, however, may have simply affirmed a trend that has generally been in place for more than a year, when economic activity and inflation began to accelerate following the initial pandemic shock.
- That is, the 10-year U.S. Treasury yield has risen from its historical lows while real yields (adjusted for rising inflation) have turned steadily more negative.1 At about zero, the real income prospects on core fixed income investments weren’t great prior to the pandemic. But the dearth of income was balanced out by notable price appreciation amid the multi-decade decline in interest rates.1
- Today’s combination of rising interest rates (from near-historically low levels) and increasing inflation, however, has created a potent mix that has deeply eroded potential income gains from core fixed income investments.
- Against today’s backdrop of rising rates and accelerating inflation, investors may be wise in seeking alternative sources of income that still have the potential to generate attractive returns.