Decline in inflation-adjusted Treasury yields signals investor doubt about future economic growth
Inflation-adjusted yields measure the actual purchasing power investors obtain from investing in government bonds. When optimism toward the economy brightens, investors typically demand a higher real yield to hold Treasury debt. Above, the Secretary of the Treasury building in Washington. Photo: Stephen Voss for The Wall Street Journal
Inflation-adjusted yields on U.S. government bonds have tumbled over the past month, the latest sign of moderating market expectations for the Trump administration’s economic plan.
So-called real yields, which subtract inflation readings from the 10-year U.S. Treasury note’s yield, have dropped to a recent 0.38% from 0.74% at their mid-December postelection peak. Real yields tend to rise with a strengthening economy, so the surge following Donald Trump’s Nov. 8 election signaled a global expansion of economic activity was under way.
The yield decline and a recent pullback in the U.S. dollar’s wwvalue suggest that investors are reassessing their initial enthusiasm for the so-called Trump trade, in which expectations of higher growth and inflation fueled sharp gains in U.S. stock indexes, the dollar and the prices of many commodities.
The real yield hit its high four days after the Dow industrials hit their all-time closing high of 19974.62, a mark the index has failed to surpass in 2017 despite several runs toward a first-ever close above 20000. On Friday, the Dow fell five points to 19885.76.
Declines in real yields and the dollar are “a sign that people are not believing that Trump policy will be able to boost economic growth, and mostly will only affect inflation,’’ said Zhiwei Ren, portfolio manager with Penn Mutual Asset Management.
Inflation-adjusted yields measure the actual purchasing power investors obtain from investing in government bonds. When optimism toward the economy brightens, investors typically demand a higher real yield to hold Treasury debt.
The 10-year real yield remains well above its level before Mr. Trump’s election, 0.15% on Nov. 8. Real yields at 10 years were briefly negative earlier in 2016, reflecting fears that the global economy was headed for a long period of ultralow rates and tepid growth. Yields fall as bond prices rise.