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Quantitative Finance · Glossary

What is Real yield, breakeven inflation rate?

Also known as: real yield · breakeven inflation rate

Definition 11.4 Markets II: Rates, FX and Credit · Chapter 11 — Inflation Markets

The real yield of an index-linked bond is the yield to maturity of its real cash flows (the fixed coupon and the face value, in units of today’s index) at its real price, the quoted price per 100 of adjusted principal. The breakeven inflation rate at a maturity is the constant inflation rate at which a nominal bond and a linker of that maturity have the same return:

1+ynom  =  (1+yreal)(1+πBE),πBE≈ynom−yreal.(11.2)1 + y_{\mathrm{nom}} \;=\; (1 + y_{\mathrm{real}})(1 + \pi_{\mathrm{BE}}), \qquad \pi_{\mathrm{BE}} \approx y_{\mathrm{nom}} - y_{\mathrm{real}}.\tag{11.2}
Ten-year nominal and real Treasury yields and the breakeven between them, month ends, January 2018 to August 2026. In 2022 the real yield rose by more than two and a half percentage points while the breakeven hardly moved: the losses of inflation-linked bonds that year came from real rates. Data: FRED series DGS10, DFII10 and T10YIE.
Figure 11.2. Ten-year nominal and real Treasury yields and the breakeven between them, month ends, January 2018 to August 2026. In 2022 the real yield rose by more than two and a half percentage points while the breakeven hardly moved: the losses of inflation-linked bonds that year came from real rates. Data: FRED series DGS10, DFII10 and T10YIE.
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