Email of the day on real yields
Comment of the Day

June 29 2022

Commentary by Eoin Treacy

Email of the day on real yields

Could you please explain how the Fed US Treasury H15 Constant Maturity 10 Yr Real Yield (H15X10YR Index) is calculated?

Eoin Treacy's view

Thank you for this question which others may have an interest in. A lot of the answer can be found by comparing the chart of the constant maturity real yield with the TIPS chart.

The only difference I can see is that the constant maturity imputes an accurate bond yield with exactly 10-years to mature even when there is no bond that matches that exact maturity. I am growing progressively more distrustful of these kinds of measures which rely on TIPS. It's a very small market and the Federal Reserve is very active in it, so it is unlikely to give an accurate depiction of what the real yield in fact is.
If we spread core CPI over Treasuries we get a very different picture that more accurately reflects the lived experience. It helps to highlight why the Federal Reserve is talking about raising rates another 175 points before they believe rates will be restrictive.

The stress being experienced by financial markets despite the fact real rates are still negative is a symptom of how sensitive to leverage all markets now are and the underlying weaknesses in the private unlisted sector.

The Wu Xia Shadow Banking Index has not been updated since late February but is likely to jump higher when it is.

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