Tuesday, September 6, 2011

Real Treasury Yields at Zero

The 10-year Treasury bond hit a milestone of sorts last week: On Friday, according to the Treasury Department, the real yield on that bond was exactly zero. In other words, the true cost to the federal government for borrowing money on a ten-year horizon is nothing, and the true benefit to investors for lending money to the federal government for ten years is nothing.

The real yield is figured by taking the yield that ten-year Treasurys are paying, and subtracting the expected inflation rate over that same ten-tear period, as expressed in the TIPS (or Treasury Inflation-Protected Securities) rate. Obviously, the yield on the ten-year Treasury has been in the doldrums lately, closing Friday at just a smidge over 2 percent. That leaves it - at least for one day- right at the expectation for inflation.

The real yield had hovered between 0.75 percent and 1 percent most of the year, before plummeting in early August, at the time of the debt-ceiling standoff. It had actually stood at zero once before this year, on August 9th; where it heads next is anyone's guess.

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