Real Yield Expectations & Impacts


The inflation rate has been rising for around 2 years due to the tremendous amount of money printed during the pandemic. As an inevitable consequence of the money printing operations, the central banks triggered a wave of inflation all around the world. While, in the early times of the rising inflation rate, people tended to buy assets and melt the debt in the inflation, the increase of interest rates caused these actions to cease, too.

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As a result, people do not want to spend as much as they do in the initial phases of inflation and the reluctance to spend money gives birth to a slowdown or recession of the economy when the markets have no volume or new buyers.

The increasing Treasury Bonds' yield may come with the good results of a slowdown in the economy to deal with the inflation monster. We can depict the inflation as a thin layer of ice on a pond. When the ice is broken, the resistance of inflation will be overcome, too.

Real Yields & Investment Appetite

Recently, the 10-year US Treasury Bond Yield has surpassed the core PCED (the index that counts both consumer and producer price index) and it is seen as a new hope on the horizon.

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Yardeni

When the money does not circulate and has no velocity in the economy and the yields are safe and profitable places to be in, the prices of things cannot find a way to go up because there will no longer be the same demand for what is being supplied. If a seller cannot sell the products and make a profit, s/he has to lower the prices and sell it so that the debt can be paid.

From the side of investors, these days are the times when money is put into "safe" heavens rather than risky but, possibly, more profitable markets. However, the best side of these times might be the step-by-step normalization starting from the real yield point.

The Length of Normalization

I think the only issue we need to discuss is the length of the slowly but firmly applied normalization steps. The chart on Yardeni shows the trend of after the real yield point. However, as you see, the time in this process is really a big concern as investors may have to wait for a couple of years to get to the level they want to be in.

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My personal expectation is to see 2 charts that complete each other.

First of all, the real yield needs to be sustained but both the inflation on consumers and producers' sides should go lower in line with the downtrend in 10-year bond yield. When this is achieved, we can proceed to the second condition.

The central banks should finalize the quantitative tightening process and the markets need to get more liquidity via the money flows into the assets. If these can be achieved, then I think investors will start to see the price level that they dream of. Apart from these two major factors, the inner cycles of the investment categories also matter. For example, we are approaching the day of halving in Bitcoin and this is one of the most important events for the crypto ecosystem as a reason for positivity in the market.

Though the market has a bunch of positive and negative news, I believe the strength of negative news outperforms the positive ones.

What do you expect from real yields? Share your ideas below

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