What Do 14-Year High Real Yields Mean for the Economy?
The last time you could lock in a real (inflation-adjusted) yield with inflation-adjusted Treasuries (TIPS), the world was still cleaning up the mess from the financial crisis. A lot has changed since then, but current yields for 5- and 10-year TIPS securities have come full circle.
The jump in real yields has various implications for the economy, financial markets, and investors. Here’s a quick look at where we stand and how some analysts are analyzing the recent increase in inflation-adjusted rates.
Let’s start by reviewing 5 and 10-year TIPS yields. The former edged up to 2.21% (Aug. 21), the highest since 2008. The 10-year equivalent is close behind and is currently 2.0%, a 14-year high.
The rise in real yields hasn’t gone unnoticed and for good reason. As Mark Rzepczynski, a veteran financial analyst, observes in his blog Disciplined Systematic Global Macro Views:
Higher real rates increase the true cost of capital Levered firms will lose. New investment project will be placed on hold. The housing market will further tighten. Economic activity will slow although the extent of this slowing is unclear. Stock market valuations will decline…
The core message is that real rate normalization will have spillover to the rest of the economy and asset prices. Fixed income repricing cannot be looked at in isolation.
Waddell & Associates CEO and chief investment strategist David Waddell tells Yahoo Finance advises that higher real yields will also influence policy decisions at the Federal Reserve:
Remember that while the Fed controls the policy rate, the real interest rate is what matters for the economy, and that’s going through the roof as inflation to come down and then the headline rates go up. So I’m not sure the Fed
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