Real yield

Real yield measures the return a bond delivers after accounting for expected inflation over its life. TIPS pay a coupon plus an inflation adjustment to principal, so their quoted yield is already real. For an ordinary nominal Treasury, the real yield is estimated by subtracting the market's inflation expectation, typically read from the breakeven rate on a matching-maturity TIPS, from the nominal yield. A positive real yield means bondholders are compensated for inflation with something left over; a negative one means inflation is expected to erode more value than the bond pays.

Rising real yields generally reflect either a stronger expected growth outlook, tighter Fed policy, or both, and they tend to pressure valuations on assets, like growth stocks and gold, that don't pay a yield of their own to compete with. Falling or negative real yields do the opposite, making non-yielding assets relatively more attractive. The 10-year real yield specifically is watched as a proxy for the market's view of the economy's underlying cost of capital, separate from whatever inflation happens to be doing at that moment.

The breakeven inflation rate used to back out a real yield is itself a market expectation, not a certainty, and it can be distorted by TIPS-specific supply and liquidity effects that have nothing to do with actual inflation views. TIPS trade in a smaller, less liquid market than plain Treasuries, so their pricing can occasionally lag or diverge during periods of market stress. And a real yield says nothing about which direction caused the move, whether nominal yields rose, inflation expectations fell, or both moved at once, each of which implies a different read on the economy.

Suppose the nominal 10-year Treasury yields 4.55% while the 10-year TIPS yields 1.95%. Subtracting gives a breakeven inflation rate of roughly 2.6%, close to what the market expects average annual inflation to run over the next decade, and the 1.95% figure is the real yield: what a TIPS holder earns above inflation. If the nominal yield later climbs to 4.85% while the TIPS yield only rises to 2.05%, real yields have risen less than nominal ones, meaning the extra move was mostly inflation expectations climbing rather than a change in the market's growth outlook.