It’s a simple calculation, although the implications may be huge.
Adjusting the 10-year Treasury yield by consumer price inflation tells us what we already know: money is loose, and by design. The Federal Reserve has been intentionally pumping liquidity into the economy to cure the various ills that hound the American business machine. But with the real (inflation adjusted) 10-year yield plumbing depths rarely seen, it’s time to ask (again) what it all means.
As the chart above illustrates, the CPI-adjusted 10-year yield dropped to -0.8% in June. That’s the lowest negative real yield for the benchmark Treasury since 1980. Using last night’s closing 4.09% yield and June’s 4.9% 12-month CPI change, we remain at roughly -0.8%.
What does it imply? That depends on your expectations. It could mean that we’re giving inflation the fuel it needs to take deeper root in coming years. Or, it mean be just the ticket to temper the economic contraction that’s set to get worse.
No one really knows which scenario is coming. Rather than attempt the impossible, let’s review how we’re calculating real Treasury yields to gain a bit of perspective of where we’ve been and where we may be going.
For the chart above, we begin with the monthly average for the constant maturity for the 10-year Treasury, as per the St. Louis Fed. We then adjust that monthly number by the comparable 12-month trailing change in CPI, as reported by the Bureau of Labor Statistics.