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13 Dec 2021

Bond Traders are Now Looking at the Worst Real Returns Since Paul Volcker Era

The Index Today

Treasury investors are now losing more money than they have in four decades, once inflation is taken into account. And if the market trends and forecasts are right, they’re unlikely to see better result of their investment ahead for years.
According to the previous present data, the federal government’s debt has already lost about 2% altogether over the past year as the Federal Reserve started removing pandemic-era stimulus from the economy and are now inched closer toward raising interest rates. But on top of that, the latest consumer price index has increased about 6.8%, putting investors even deeper in the hole.

Taken together with the present data given today, that’s resulting in the worst real returns recorded -- or those adjusted for inflation -- since the early 1980s, when then Fed Chair Paul Volcker was in the middle of fighting a wage-price spiral. What’s more, the dynamic isn’t expected to change: The bond market is projecting that 10-year Treasury yields will hold below the inflation rate for the next decade, meaning any investment income will be more than wiped out by the rising cost of living.

The persistently low level of long-term yields in the face of the steepest inflation in decades has been a major puzzle on Wall Street, since it defies the textbook expectation that investors would demand higher payouts in return. In 1982, last time year-on-year inflation surged as much as it did in November, the 10-year yield climbed as high as nearly 15%. It’s around 1.5% now, Bloomberg news reported.

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