Yields on U.S. government bonds have fallen broadly this year. But the decline in the yield on one particular type has been especially persistent and is, according to some investors, a sign of concern for the U.S. economy.
Since last fall, the yield on 10-year Treasury inflation-protected securities, a measure of what are known as real yields, has tumbled from a high of 1.154% to a recent low of 0.241%, the stingiest rate of return since November 2016.
Real yields are notable because they show the purchasing power investors can expect to obtain from government bonds after accounting for inflation. In recent weeks, they have fallen even as the more-closely-followed nominal 10-year Treasury yield has stabilized at just above 2%.
The continued decline in the 10-year TIPS yield is potentially worrisome because it is sometimes viewed as a gauge of economic growth expectations, one even more refined than the nominal yield.
At least in theory, “real yields and real growth should be tied together,” said Thomas Simons, senior vice president and money-market economist in the fixed-income group at Jefferies.
Because the TIPS yield removes the expected rate of inflation baked into the nominal Treasury yield, it can be seen as the baseline, or risk-free, rate of return investors expect from investing in the U.S. economy. Its decline, therefore, suggests investors are anticipating slower growth.
Some analysts warn about reading too much into the decline in real yields. While there is little question that low nominal and real yields reflect concern about the economic outlook, their divergence over a short period can reflect idiosyncratic factors such as slow summer trading.
One reason why real yields may have declined in recent weeks is that investors are buying TIPS as insurance against a surprise uptick in inflation as the Federal Reserve prepares to cut interest rates, said Jim Vogel, an interest-rates strategist at FTN Financial.
Even so, investors and analysts say there is a broad consensus that inflation won’t break above the Fed’s 2% target anytime soon and that low inflation expectations remain a major force pushing down nominal yields.
Apart from their status as economic barometers, real yields can also matter because of their influence on borrowing and investing decisions. In general, falling real yields should encourage businesses and consumers to borrow because the cost is lowered.
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That impact, however, “is probably going to be marginal at best,” said Anthony Karydakis, an adjunct professor at New York University’s Stern School of Business. The reason, he said, is that corporate borrowing will likely be slowed by worries about trade tensions. Consumers, meanwhile, pay more attention to nominal yields than real yields and could be dissuaded from borrowing anyway because of such factors as high home prices.
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