essays pieces of the puzzle
Sunday, April 15th, 2012
watch these yields

The low rate environment trudges on.  This chart shows what has happened to ten-year rates since the turn of the century.

Top:  Yields on the benchmark Treasury have been in steady decline, along with those on similarly-dated Treasury Inflation-Protected Securities (TIPS).  Much has been made of the negative yields on TIPS now, but the expectation is that the boost you’ll get from the inflation adjustment will give you a similar (but still meager) return as the regular variety of Treasury note.

Middle:  The breakeven rate is the difference between the two lines in the top panel, and it serves as one measure of expectations regarding future inflation.  You can see that the breakeven yield is right about where it has been over time.  A whiff of deflation presented a great buying opportunity in early 2009 and TIPS have done very well since then as the spread reverted to normal.

Bottom:  The real yield on ten-year bonds has been negative for quite a while now.  (This the ten-year yield minus the CPI; other real yield calculations may use different inflation measures.)

The future path of these lines will tell the tale for the performance of a variety of asset classes going forward:  Bonds of all stripes, of course, but equities too and certainly precious metals and other “hard” assets.  (Bloomberg terminal.  Monthly observations.)