Definition
Real yield represents the true increase in purchasing power from a bond investment. Nominal yields can be misleading when inflation is high. TIPS yields directly represent real yields. For nominal bonds, the real yield is approximated by subtracting expected inflation. Negative real yields mean bonds are guaranteed to lose purchasing power.
functions Formula
Real Yield ≈ Nominal Yield − Expected Inflation
lightbulb Example
A 10-year Treasury yields 4.5%, TIPS yields 2.0%. The implied inflation expectation (breakeven) is 2.5%. The 2.0% TIPS yield is the real return regardless of actual inflation.
verified_user Key Points
- TIPS yield directly measures real return
- Negative real yields erode purchasing power
- Real yield drives long-term wealth accumulation
- Fisher equation: (1+nominal) = (1+real)(1+inflation)