The Fed’s Zero-Interest-Rate Policy Keeps Real Yields in Negative Territory

June 17, 2021

Source: Bloomberg Source: Bloomberg

Treasury Inflation-Protected Securities (TIPS) were first issued by the United States Government in January 1997. This week’s chart looks back at the nearly 25-year history of a fixed income asset class that differs from nominal Treasury bonds through its ability to help combat inflation risks. Principal repayment at maturity for TIPS adjusts upward or downward by the level of inflation as measured by the monthly Consumer Price Index (CPI).

Yields on TIPS peaked above 4% in late 1999 but have moved steadily lower alongside falling yields on cash and money market alternatives. Zero short-term interest rates are becoming the new normal for a Federal Reserve (Fed) that is more willing to remain in crisis-fighting mode. As a result, real cash yields are now the most negative since TIPS were first issued and have supported TIPS prices this year despite the move higher in longer-term Treasury rates.

Key Takeaway    

A steady string of record-high equity market closes, credit spreads near the post-financial-crisis tights and yields on TIPS in deeply negative territory indicate the Fed’s policy of devaluing cash to push investors out the risk curve is working as intended. Even though fixed-income investors are increasingly buying into the transitory inflation messaging from the Fed, mounting inflation risks are likely to force the Fed’s hand to tighten more quickly than markets are expecting today, moving yields on TIPS higher in the process.

Tags: Treasury Inflation-Protected Securities (TIPS) | Federal Reserve | Inflation | Risk curve | Yields | Interest rates | Consumer Price Index (CPI)

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