Prospective Real Returns in Fixed Income

Abstract

In this paper, we discuss the potential long-term real return implications of current yield levels in developed economies’ government bond markets. Treasury yields in the major economies are at or very close to their historical lows. Forward-looking measures of real yields based on inflation-indexed bonds or on surveys of long-term inflation expectations are depressed. From a strategic point of view, we must consider the longer-term implications of increased public indebtedness and unconventional monetary measures, such as quantitative easing, on our return expectations. Against this background, we conduct various decompositions of nominal yields into their real, inflation and risk premia components to assess the compensation that we can expect to receive for holding bonds over a five- to ten-year horizon.