Treasury Borrowing Rates – Nominal And Real
Rising government debt-to-GDP ratios should be viewed in the context of borrowing costs. Below, three-and-a-half decades of ten-year Treasury yields.
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Figure 1: Nominal ten-year constant maturity Treasury yields (black line), CBO projection (green line), WSJ November survey mean yields (orange +), TIPS ten year constant maturity yields (red line), ten-year expected inflation-adjusted (real) yields (lavender x). Inflation adjustment using Survey of Professional Forecasters (SPF) median survey response for 10-year CPI inflation. Source: Federal Reserve via FRED, CBO (July), SPF, and author’s calculations.
The WSJ forecast implies rising nominal Treasury yields. A cautionary note about interest rate forecasts is provided by the following figure, depicting the actual Treasury ten year yield, and the SPF forecasts at several junctures.
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Figure 2: Professional Forecasters’ Projections. Source: Figure 3 from Kirby, Barry, “Diminishing Returns: The Incredible Shrinking Bond Yield,” CapTrust, October 24, 2019.
In other words, we’ve been expecting a reversion to (earlier) mean too often over the past two decades.
Disclosure: None.