Do ‘real’ interest rates really look wrong?
There is no good reason to assume TIPS yields follow economic growth
Blackrock bond strategist Rick Rieder told Bloomberg this morning, “Real rates in the world are wrong, they’re just priced wrong relative to the growth rate,” which he expects to be around 3% in the US.
Why should anyone assume that the yield on inflation-protected US Treasuries has anything to do with the growth rate of the economy? Treasury securities have other uses, for example, disaster insurance. If the US dollar crashes and inflation soars, TIPS will pay off in a big way. Like gold, TIPS provide something like a deep-out-of-the-money put on the dollar.
TIPS yields also reflect the expected future interest rate, which depends not on economic growth, but what the astrologers at the Federal Reserve assume that economic growth will be.
A simple model that compares the 10-year TIPS yield to the expected federal funds rate 12 months ahead and the price of gold explains most of the TIPS yield.