Updated Aug 23, 2023 - Economy & Business

After 15 years, savers are finally getting paid

Data: FactSet; Chart: Axios Visuals
Data: FactSet; Chart: Axios Visuals

Government bonds are offering the best after-inflation yields since 2007.

Why it matters: It means the long, lamented era of "negative real yields" — when some saw no alternative to putting their money in stocks — is over.

Be smart: Real yields tell you how much the interest payments on government bonds are beating inflation.

  • As a practical matter, real yields are basically the yields on Treasury Inflation-Protected Securities. (More on TIPS here.)
  • The yield on the 5-year TIPS security is charted above.

State of play: It's zoomed back to positive territory as the Fed jacked up interest rates over the last year.

  • This is a good thing for people looking to grow their money without taking on much risk.
  • They can just buy these government bonds, and once they receive their coupon payments, they'll be richer, even accounting for inflation.

Yes, but: High real rates can be a problem for economic growth. Here's why.

  • Real yields are also kind of like the hurdle rate — the minimum return investors have in mind, to make it worth putting their money at risk — that the potential returns of all business ideas are measured against.
  • When real yields are super low, or even negative, as we saw at times over the last 15 years or so, virtually any investment proposition looks good in comparison.
  • Capital then flows easily to businesspeople, who use the money to build things, buy equipment and hire workers.
  • But if real yields are higher, it raises the bar for all the entrepreneurs hoping to attract investment capital.

The bottom line: As real rates rise, the universe of investment ideas that investors will fund shrinks.

  • And some business activities that were worth investing in when real rates were low won't happen.
  • This doesn't have to be an economic disaster, but it can be a headwind.

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