WisdomTree Minds on the Markets
WisdomTree
Minds on the Markets
WisdomTree
Minds on the Markets
Archive: December 11, 2023
Let’s Get Real
The recent plummet in Treasury yields has been one for the ages. Certainly, a 90 basis points (bps) decline in the UST 10-Year yield over the course of six weeks or so will do that.
Naturally, with the Treasury 10-Year being viewed as the domestic, if not global, bond market benchmark, it makes a lot of sense for the focus to center on the yield movements there. However, there is an important underlying ingredient in this whole process, and that’s real yields.
When looking at UST yields, investors have two options to focus on: nominal yields and real yields. Nominal yields, such as the aforementioned 10-Year, actually begin with a real yield and add into the mix the expected rate of inflation. Thinking about it another way, real yields are derived by taking the nominal rate and subtracting that expected rate of inflation. Think of real yields as the baseline for constructing Treasury yields that we all are familiar with.
Oftentimes, the movement in a nominal yield, like the UST 10-Year yield, occurs as a direct result of what is transpiring in the real yield. So, let’s take a look at the most recent action. As we mentioned, from its October high watermark of 4.99%, the nominal UST 10-Year yield plunged about 90 bps to a low of 4.10% just last week. During this same timeframe, the 10-Year Treasury Inflation-Protected Security (TIPS) saw its yield level fall almost 60 bps. In other words, the real yield decline accounted for two-thirds of the drop in the nominal UST 10-Year rate.
Where do we go from here? In order to provide some perspective, some history of the 10-Year TIPS could be helpful. The October peak of more than 2.50% represented its highest reading in roughly 15 years. In fact, during the decade spanning 2010–2020, the 10-Year TIPS yield averaged a historically low reading of only 0.39%.
Does this latest mark above the 2% threshold represent an abnormal development? Quite the contrary: from its inception in 1997 through 2009, the 10-Year TIPS yield registered an average reading of 2.69%, not all that far removed from the recent October high point.
We believe U.S. fixed income yields have entered a new rate regime whereby rates have moved back to the levels that existed essentially before the financial crisis. It may not always be a straight road, as we have recently witnessed, but yields appear to have returned to what we would consider more “normal” readings. Against this backdrop, real yields with a “2” handle would be closer to the historical norm, while rates with a “zero” handle would not.
For more information, contact your WisdomTree representative or visit WisdomTree.com/investments.
To obtain a prospectus containing this and other important information, please call 866.909.9473, or visit WisdomTree.com/investments to view or download a prospectus online. Read the prospectus carefully before you invest. Past performance does not guarantee future results. Important Risk Information: There are risks associated with investing, including possible loss of principal. Foreign investing involves currency, political and economic risk. Funds focusing on a single country and/or sector and/or funds that emphasize investments in smaller companies may experience greater price volatility. Investments in emerging markets, real estate, currency, fixed income and alternative investments include additional risks. Please see prospectus for discussion of risks. This material contains the opinions of the authors, which are subject to change, and should not be considered or interpreted as a recommendation to participate in any particular trading strategy or deemed to be an offer or sale of any investment product, and it should not be relied on as such. There is no guarantee that any strategies discussed will work under all market conditions. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results. This material should not be relied upon as research or investment advice regarding any security in particular. The user of this information assumes the entire risk of any use made of the information provided herein. Kevin Flanagan and Jeff Weniger are Registered Representatives of Foreside Fund Services, LLC. WisdomTree Funds are distributed by Foreside Fund Services, LLC.