Have we ever seen a huge blowout in real yields?

by cbus20122

Real bond yields have risen higher in the past year (after being negative for a long time). For people who don’t know what this means, real yield is basically the rate of return on a bond vs. the rate of inflation. If real yields are negative, that means your money being parked in a bond or debt instrument is actually losing money to inflation if the real yield is negative.

Now, we’ve been in an environment where we’ve seen negative real yields for quite some time only for that to finally change in the last 1-2 years, but I’m kind of curious, have we ever seen an environment with extremely high real yields? I was trying to find some data on this but wasn’t able to dig up much since the Fed’s tracking of 5 year tips yields only goes back so far (a decent proxy for real yield).

I’m mostly curious because I tend to think if this were to occur, there may be a lot of really interesting consequences, and I was curious to see if history had any points of reference.

And just a quick hypothetical as to why I’m curious here of consequences

Just for reference, I’m not saying I think we’ll see this happen, but there are a few scenarios out there that I think could potentially cause this even if they’re not particularly likely. Those scenarios mostly being linked to the Chinese selling of their US treasury positions. Many people have brought up that they may do this as a weapon in the trade war. I think this has been largely debunked as suicidal for China. With that said, there is another scenario that would involve Chinese selling of US treasuries in volume which has already occurred in a minor fashion, that being to protect their currency. If we were to hypothetically see a Chinese monetary crisis, we would likely see China selling big chunks of their US treasury positions to defend and stabilize their currency. They did this in 2016, and have started doing it again recently. And no, it’s not really a problem right now, but if there were hypothetically a full-blown currency crisis in China, we could get a really weird scenario where bond yields blow way higher in the USA without any actual inflation to go with it. Given, a full-blown Chinese currency crisis would cause a LOT more problems than just bond yields running higher in the USA, but it’s still a really odd scenario that to me seems entirely plausible.

And since I know people will ask or comment on this, I’m not calling for a China currency crisis right now, but I do believe there is some potential for it to occur.

328 views