Wednesday, February 11, 2009

Real Treasury Yields Moving Lower

Even with the Treasury sell-off witnessed over the past few weeks, with expectations for inflation on the rise, real yields of Treasury bonds (as computed by taking the nominal Treasury rate and subtracting the implied inflation rate embedded in an inflation swap) have been declining at a rapid rate.

(Note that I didn't just graph TIPS real rates as TIPS are trading cheap due to technical / liquidity issues). What does this all mean?

  • The Good: The U.S. Government is borrowing on the cheap (and needs to borrow a lot so cheap = good)
  • The Bad: Real rates are the lowest they have been since Lehman went under... signifying continued stress in markets if investors are willing to take 0.50% real returns over the next 5 AND 10 years


  1. Isn't it actual inflation that matters, rather than expected?

  2. hey paul- two things. how is it possible to know actual inflation on a going forward basis? expected equates to the expected real return investors are willing to accept