What Rising Real Yields Mean for Investors

What Rising Real Yields Mean for Investors

Treasury yields have pushed sharply higher, worth examining closely because it is real yields, not just nominal ones, that matter most for long-term investors. A nominal yield is the stated rate on a bond; the real yield adjusts that figure for expected inflation, representing the true return to savers and a key benchmark against which every other asset class is measured.

Real Yields Rebound

Today the 10-year nominal Treasury yield stands at roughly 4.7%, while the corresponding real yield is about 2.4%, well above levels seen since the global financial crisis. This marks a sharp reversal from 2020, when real yields on government bonds turned negative as the Fed cut rates to push investors toward stocks, real estate, and other higher-yielding assets.

Yields Stay Elevated

Several factors are keeping long-term yields elevated. Oil prices have risen back above $90 a barrel for Brent crude amid the ongoing war in Iran, feeding directly into broader inflation concerns. Separately, the rising national debt and federal budget deficit, now above $39 trillion, continue to push up the term premium investors require to hold longer-term bonds.

Bonds Challenge Stocks

Higher real yields change the calculus for portfolio construction. The S&P 500’s earnings yield sits at roughly 4.9%, corresponding to a forward P/E near 20x. When real bond yields were near zero, as in much of the post-2008 era, stocks faced little competition for investor capital, a dynamic often called TINA, or “there is no alternative.” With real yields near multi-year highs, that competition has returned, making the balance between stocks and bonds in a portfolio more consequential than it has been in years.

Warsh Eyes Tightening

Fed policy under new Chairman Kevin Warsh adds a further variable. A task force he has launched is examining the central bank’s $6.7 trillion balance sheet, which, despite shrinking in recent years, remains far larger than before 2008. Warsh has favored shrinking the balance sheet during healthy economic periods, a move that would put additional upward pressure on Treasury yields alongside expected rate hikes.

As Always

I’d like to leave you with the final line we’ve used since we started these commentaries back at the very height of market volatility in March 2020. Always remember that we create financial/investment plans not for the easy times, but to prepare for the tough ones.