Friday, 12 March, 2021
CHRIS JARVIS: How much higher could real yields rise? Chris Jarvis
How much higher could real yields rise?
Real yields {GTII10 Govt <GO>} continue their trend pushing higher driven in large party by an unwind in positioning and the accompanying rising TIPS liquidity premium from depressed levels. Gaining some insight into how much further real yields could rise from here, in Feb rising liquidity premium contributed 19bps to the rise in the 10y real yield and ended the month at -0.39. This is still 57bps below the 10y average (0.18) implying plenty of room for real yields to move higher from this angle, while breakevens are already at the fed target suggesting little room for higher inflation expectations to offset this pressure toward rising real yields.
This is a similar message to the BIS last week (What drove the recent increase in the US inflation break-even rate?- https://www.bis.org/publ/qtrpdf/r_qt2103x.htm while the Fed put changes in TIPS liquidity premium down to “Apart from lower liquidity of TIPS relative to nominal Treasuries, this premium may also reflect supply-demand imbalance of TIPS versus nominal securities and a greater concentration of buy-and-hold investors in TIPS market compared with the nominal Treasury market” https://www.federalreserve.gov/econres/notes/feds-notes/tips-from-tips-update-and-discussions-20190521.htm)https://twitter.com/patrick_oshag/status/1369272486618103809
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