Fed Will All But Guarantee Negative Real Yields

Federal Reserve Chair Jerome Powell has likely heard it all about negative U.S. real yields: How they’re devastating for pensions and life insurers, causing equity valuations to outpace the economic recovery, encouraging a stampede into gold and out of the dollar and giving the green light for American companies to gorge on cheap debt once again.

The message he and his colleagues are likely to convey at their meeting this week: That’s all fine with us.

For months now, the benchmark 10-year U.S. Treasury yield has been stuck around 0.6%. Bond traders have had little reason to wager it’ll change much, given that the Fed is still purchasing $80 billion of Treasuries each month and keeping the door open to yield-curve control, which would ensure that short-term rates are pinned near zero. Meanwhile, the market’s inflation expectations for the coming decade have marched gradually higher in the wake of fiscal relief efforts across the globe, reaching 1.5% last week for the first time since February.

The difference between the two is the “real” 10-year U.S. yield. Last week it fell to -0.93%, breaking through the all-time low closing level of -0.92% set in December 2012, which was part of an unprecedented 382-trading-day stretch from November 2011 to June 2013 in which the inflation-adjusted 10-year yield never closed above zero.

Sub-Zero Guarantee

If the Fed has its way, the current 87-day streak of negative real yields should easily last at least 300 more days — if not longer — to smash that record. Bank of America Corp. strategists are among those who say real rates could drop to -1% if the coronavirus pandemic looms over the economic recovery and encourages central bankers to strengthen their forward guidance.