Chart of the week

As inflation rises, real yields fall further

October’s inflation report continues to rattle markets, as real rates have plummeted. Our chart looks at the wide gap between nominal and real rates.

November 19, 2021 | 2 minute read

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.

  • Bloomberg Finance, L.P., as of November 17, 2021.

The chart of the week and any accompanying data is for informational purposes only and shall not be considered an investment recommendation or promotion of FS Investments or any FS Investments fund. The chart of the week is subject to change at any time based on market or other conditions, and FS Investments and FS Investment Solutions, LLC disclaim any responsibility to update such market commentary. The chart of the week should not be relied on as investment advice, and because investment decisions for the FS Investments funds are based on numerous factors, may not be relied on as an indication of the investment intent of any FS Investments fund. None of FS Investments, its funds, FS Investment Solutions, LLC or their respective affiliates can be held responsible for any direct or incidental loss incurred as a result of any reliance on the chart of the week or other opinions expressed therein. Any discussion of past performance should not be used as an indicator of future results.

This information is educational in nature and does not constitute a financial promotion, investment advice or an inducement or incitement to participate in any product, offering or investment. FS Investments is not adopting, making a recommendation for or endorsing any investment strategy or particular security. All views, opinions and positions expressed herein are that of the author and do not necessarily reflect the views, opinions or positions of FS Investments. All opinions are subject to change without notice, and you should always obtain current information and perform due diligence before participating in any investment. FS Investments does not provide legal or tax advice and the information herein should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact any investment result. FS Investments cannot guarantee that the information herein is accurate, complete, or timely. FS Investments makes no warranties with regard to such information or results obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information.

Any projections, forecasts and estimates contained herein are based upon certain assumptions that the author considers reasonable. Projections are necessarily speculative in nature, and it can be expected that some or all of the assumptions underlying the projections will not materialize or will vary significantly from actual results. The inclusion of projections herein should not be regarded as a representation or guarantee regarding the reliability, accuracy or completeness of the information contained herein, and neither FS Investments nor the author are under any obligation to update or keep current such information.

All investing is subject to risk, including the possible loss of the money you invest.

Search our site