Decoding the ‘real’ disconnect between interest rates and inflation

Seeking Alpha/Tom Parker and Jeff Rosenberg (BlackRock Funds)

Repost from 9-13-2021

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“Why are markets so focused on real rates now? It’s no secret that nominal rates have been declining for a long time. COVID accelerated that trend as investors flocked to safe haven assets like Treasuries during the crisis. This pushed nominal yields down to record lows, but inflation expectations collapsed as well. In early 2021, as economies opened up and economic growth restarted, demand for Treasuries waned and nominal yields rose. But now, with economies still chugging along and yield-eating inflation rising, investors are piling back into Treasuries. The result is real yield dynamics plunging to record lows in the U.S., with the 10-year U.S. Treasury yield around 1.3%, inflation expectations around 2.3% and a real yield at -1.0%.”

USAGOLD note: A better understanding of the developing negative real rate environment has become imperative for Wall Street professionals. It should be imperative for you as well. This article by two BlackRock investment pros offers useful background for the investor looking for a primer on the subject. Because the rising inflation rate is the prime mover behind falling real yields, gold might prove to be the right balancing mechanism in modern investment portfolios.

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