U.S. Treasury yields are rising while Treasury Inflation-Protected Securities indicate that real yields have surpassed 2% [2].
This shift is significant because it challenges the prevailing market narrative that inflation pressures remain high. When real yields rise while nominal yields climb, it suggests that investors are expecting lower future inflation rather than fearing a price surge.
Data shows the five-year breakeven inflation rate has fallen to approximately 2.2% [1]. This metric represents the difference between nominal Treasury yields and the yields of TIPS, serving as a primary indicator of where the market expects inflation to settle over the medium term.
The rise in real yields marks a rare milestone, as TIPS real yields have topped 2% for the first time in more than a decade [2]. Some analysts said that real interest rates are now above their 10-year average [4].
For individual investors, these conditions create specific opportunities in the bond market. A 30-year TIPS ladder, for example, currently supports an inflation-adjusted withdrawal rate of 4.9% [2]. This allows investors to secure a guaranteed return that exceeds the rate of inflation.
However, the market remains divided on the cause of the current bond sell-off. Some investors continue to sell bonds due to lingering inflation concerns [5]. Conversely, the movement in TIPS suggests that the rise in nominal yields is driven by higher real rates—essentially the cost of borrowing stripped of inflation—rather than a spike in expected price levels [1].
“TIPS real yields have topped 2% for the first time in more than a decade”
The divergence between nominal yields and TIPS suggests a shift in market psychology. If real yields continue to rise while breakeven rates fall, it indicates that the market is pricing in a more successful cooling of inflation. This could signal that the aggressive monetary policy of the Federal Reserve is working, potentially reducing the need for further rate hikes even as nominal bond yields increase.
