• Post category:Economics

Key Points

  • Real yield is the interest rates that an investor receives from the government bonds after adjusting with inflation rate.
  • The real yield is simply calculated by the nominal yield minus the actual or expected inflation rate.
  • If a bond yield is 6% and inflation is 3%, then a real yield is 3%.
  • The concept of real yield is the same as real interest rate.

What is Real Yield Definition?

Real yield is the interest rates that an investor receives from the government bonds after deducted with inflation rate. The real yield is simply calculated by the nominal yield minus the actual or expected inflation rate.

The real yield reflect the real return in the form of purchasing power that investors will receive. The concept of real yield is the same as real interest rate in the fisher effect theory by Irving Fischer.

The real yield (5-year, 7-year, 10-year, 20-year, 30-year) is published by U.S. Department of the Treasury at Daily Treasury Par Real Yield Curve Rates

Real Yield Definition 10 year US Treasury Bond Yield
5-yr 7-yr 10-yr 20-yr 30-yr U.S. Treasury Real Yield

How to Calculate Real Yield

Real yield is the difference between nominal yield and actual or expected inflation rate. Then, the real yield equation is simply as the norminal yield minus the actual or expected inflation rate.

Real Yield = Nominal Yield – Expected Inflation Rate

where:

  • Nominal yield is the nominal coupon or a treasury yield, typically 10-year U.S. Treasury yield.
  • Expected inflation rate is the rate which consumers, businesses, investors expect, they’re using to making economic decisions. Inflation expectations as measured by the 10-Year Breakeven Inflation Rate.

For example, a 10-year U.S. Treasury bond yield with a nominal yield of 6% and expected inflation is 3%, then the real yield is 3%.

What Real Yield Telling Us?

To understand the real yield, first you need to understand inflation. Inflation is a goods and services in an economy. Speak of your saving account, interest is increasing the amount of your deposited, while inflation is reducing its value of your money.

Once the inflation is more than the interest, then your purchase power is reduce by the difference between interest rate (nominal yield) and inflation rate. This is the situation called a “negative real yield”. This is a serious implications for investing, a negative real yields push investors to take on risk investment because an investor would not be able to receive a rate of return over inflation.

Knowing the real yield gives you an idea of what to invest, and where to allocate your investment to ratain your purchasing power to make a profit among the inflation.

Real Yield US Treasury vs Gold
7-year U.S. Treasury Real Yield vs Gold

The lower number of a real yield, especially a negative real yield could lead the investor to become more reluctant to invest in safe asset like the government bonds and search for more yield. Typically, the lower real yield lead an investor to invest in gold, stock, and other higher risk assets. As you can see, from the chart above the lower real yield could lead the investor to invest in gold. In contrast, the higher real yield will lead investor to invest in risk-free investment like the goverment bond.


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