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.
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