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Government-Bond Yields and Inflation

Government-Bond Yields and Inflation

Juan Sampieri and Andy Sparks

March 19, 2021


The steep and largely negative U.S. real (inflation-adjusted) yield curve represents one of the most striking developments in the government-bond market since the onset of the pandemic. Market expectations of rising inflation, combined with the Federal Reserve’s policy of low interest rates, has pushed short-maturity real yields deep into negative territory. The real yield for the 1-year-maturity segment is now -2.5% — close to its lowest level since data became available in 1997.

Stated otherwise, if inflation picks up to levels suggested by market-implied pricing, cash investments or short-maturity instruments may experience some of their worst inflation-adjusted returns of the past two decades.

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