Real rates reach record low levels of -6.8% in USD

Since the beginning of 2021, breakeven inflation has risen sharply, and has reached almost 3% at the end of October, while breakeven inflation has been relatively steady at Investors have somehow learnt to deal with low or negative nominal yields. But now, as US real yields fell to record low levels such as -6.8% in the example for short-term real rates (see blue line in graph), bond investors need to wake up as this results in severe damage for their personal wealth. Of course, inflation rates are expected to peak soon, but even if inflation rates normalized towards 3% and short-term rates increased to 1%, a real yield of -2% will still persist, what will lead to double digit losses in purchasing power in a timeframe of only 2-3 years (i.e. 2021-2023). Taking into account a more moderate number such as the 5-year US breakeven rate, the negative yield for IG bonds still remains. It’s time to look for alternatives!

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