Real yields decline as inflation rises

Sources: Bloomberg and Wells Fargo Investment Institute. 10-year U.S. Treasury note: monthly data from January 1, 1962 to September 30, 2021. CPI: monthly data from January 1, 1962 to August 31, 2021. 5 and 10 year breakeven inflation rates: monthly data from January 1, 2003 to September 30, 2021. For illustrative purposes only. Yields represent past performance and fluctuate with market conditions. Current yields may be higher or lower than those quoted above. Past performance is no guarantee of future results. CPI measures the price of a fixed basket of goods and services purchased by an average consumer. Although Treasuries are considered free from credit risk they are subject to other types of risks. These risks include interest rate risk, which may cause the underlying value of the bond to fluctuate.

Key Takeaways

  • Real yields on 10-year U.S. Treasury bonds struggled to remain positive as actual inflation readings jumped. Inflation expectations moderated but still remain above the Federal Reserve’s long-term target of 2%.
  • In the long run, to earn positive yields above the level of inflation (real yield) — depending on risk tolerance — we think investors should consider high-yield, emerging market debt as well as dividend-paying equities.