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aversion and a somewhat improved economic outlook. There is no reason to fear the end of QE or the beginning of higher short-term interest rates. Let me explain further.
The following post is presented by Lorimer Wilson, editor of www.munKNEE.com (Your Key to Making Money!) and the FREE Market Intelligence Report newsletter (sample here). This paragraph must be included in any article re-posting to avoid copyright infringement.
Real Yields vs. Real GDP Growth
The rise in real yields on TIPS also is a sign that the market’s outlook for economic growth is improving.
As the chart below shows, real yields tend to track the economy’s growth potential over the years, which makes a lot of sense. TIPS are unique because they offer a guaranteed real rate of return…Risk-free real return should be somewhat less than the expected real growth of the economy, since that is fundamentally uncertain, but real yields have been unusually low for the past few years (e.g., real yields have been -0.5%, whereas real economic growth has been a little over 2%), which I’ve taken to be a sign that the market was very pessimistic about the outlook for growth. That’s now beginning to change for the better, as real yields move higher. It’s not that the market has turned optimistic, however, it’s more accurate to say that the market now has become less pessimistic.
Editor’s Note: The author’s views and conclusions in the above article are unaltered and no personal comments have been included to maintain the integrity of the original post. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.
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