In today’s low yield environment it is important to look at yields in both nominal and real (inflation adjusted) terms. While it is true that on a nominal basis the ten year U.S. Treasury yield (~2.5%) is well below the long term historical average yield of 6.33% (1953-2010), when the yield is adjusted to take into account inflation (using the consumer price index) the current real yield (~1.8%) is closer to the long term real average yield of 2.56% (1953-2010).
If inflation remains muted the returns on the low yielding fixed income securities could remain positive. No mater what the yield is, if inflation eats away at the fixed coupon payment the real yield can turn negative as it did during the late 1950’s, twice again in the 1970’s and recently during the first half of 2008. Inflation expectations are important to consider when purchasing fixed income securities.
REAL YIELD: Ten Year U.S. Treasury Yield Minus CPI Year Over Year: 1953- 2010
(Average 2.56% from 1953-2010)
NOMINAL YIELD: Ten Year U.S.TreasuryYield:1953-2010
(Average 6.33% from 1953-2010)