Rate hikes are about to get real
- Matt Phillips, author of Axios Markets
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.