Apr 21, 2022 - Economy

Rate hikes are about to get real

Data: FactSet; Chart: Axios Visuals

One of the most important numbers in the financial world — the yield on the 10-year Treasury note — is about to cross a major milestone.

Driving the news: Real 10-year Treasury yields — that is, bond yields after adjusting for inflation — are poised to scramble back into positive territory for the first time since the pandemic hit.

Why it matters: This is the moment when the Fed's effort to slow the economy by hiking rates actually begins to pinch — in real life.

State of play: The conventional measure of real yields — the yield on a special kind of Treasury note that's adjusted for inflation — has risen sharply, from roughly negative 1% in early March to negative 0.07% yesterday.

How it works: When real rates on Treasuries are negative, savers — including investors and business leaders — who buy government bonds basically lose a bit of money on the deal. That makes saving unattractive, compared to spending. So people tend to spend and the economy tends to strengthen.

  • When real rates go positive, it means savers can actually make a bit of money via the interest on their savings. They have a reason to save more — and spend less — which can take some of the wind out of the economy's sails.

The bottom line: This isn't like an on/off switch for the economy — but once rates go positive, it does mean we can expect to see the Fed's rate hikes start influencing actual economic activity, at least a bit more.

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