The Real Rate of Return on the 10-Year Treasury Note is back to Zero

Bob Carey
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The Real Rate of Return on the 10-Year Treasury Note is back to Zero

Posted Under: Bond Market

View from the Observation Deck

The real rate of return on a bond is calculated by subtracting the most recent inflation rate, such as the Consumer Price Index (CPI), from the bond's current yield. The higher the real rate the better.
As of the close of 6/29/18, the yield on the benchmark 10-year T-note was 2.86% (2.9% rounded), which matched the 2.9% year-over-year (YoY) rate on the CPI in June 2018. That equates to a real rate of 0.0%.
The CPI YoY rate rose significantly, from 2.1% to 2.9%, in the first half of 2018. For comparative purposes, from 1926 through June 2018, the CPI YoY rate averaged 3.0%, according to Bloomberg.
Including the initial rate hike on 12/16/15, the Federal Reserve has raised its federal funds target rate (upper bound) seven times, from 0.25% to 2.00%, or an increase of 175 basis points (bps). Over that same period, the yield on the 10-year T-note rose just 56 bps, according to Bloomberg.
With inflation on the rise, we believe bond investors are likely going to have make a judgement call relatively soon as to whether, or not, they believe that U.S. economic growth will accelerate in the coming months. After all, that was one of the primary goals behind the drafting of the Tax Cuts and Jobs Act (December 2017).
The chart and performance data referenced are for illustrative purposes only and not indicative of any actual investment.

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Posted on Tuesday, July 17, 2018 @ 2:46 PM • Post Link

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These posts were prepared by First Trust Advisors L.P., and reflect the current opinion of the authors. They are based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.

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