[nwiswell]

Do treasury yields actually have a causal relationship with anything besides the demand and supply of treasury bonds? I don't see any reason why we can't have a negative real yield (indeed, I suspect that is presently the case).

[P00RL3N0]

You may be right on the negative real yield. My thinking was that, ceteris paribus, if expected inflation is rising I would expect interest rates to rise as well. QE has likely been playing a large role in muting this effect.

[pishpash]

The metric you want is the breakeven rate, the difference between nominal Treasury yields and TIPS yields (which are indeed very negative).

https://fred.stlouisfed.org/series/T10YIE

The Fed is artificially holding real yields negative on the short end for years at a time to enable money-losing ventures to "prosper" in order to "stimulate" the economy. It gets people working and society running but the long-term misallocation of capital can't be good. Real yields have been negative out to 30 years for some time now, meaning the real economy could well be full of stuff that destroys value over a 30-year horizon as a norm!

[hogFeast]

There is actually a parallel effect of QE that no-one really wrote about: it causes a shortage of risk-free assets, and makes it harder for savers to fund liabilities.

I can believe that QE had a positive portfolio effect in the early 2010s. But no-one really acknowledged the downsides (it took them most of the 2010s to work out why QE "worked").

So we have the amazing situation where you will get funding for a project, but only if you promise to lose money. Investment into real assets is extremely low, chemicals and O&G are trading on mid-single digit P/E ratios, and are furiously trying to return capital...whilst we have massive shortages...it is a very unusual situation. And, imo, the cause of this is the shortage of risk-free assets (because creating this shortage, due partly to regulatory restrictions, did not mean that investors suddenly started making investments into the real economy...most couldn't...they just had to buy more "risk-free" assets from corporates who already had too much money or PE funds that were playing the capital cycle...ofc, no central banker understands that some institutions are limited, the textbook doesn't teach that, they don't understand it).

[richiebful1]

I don't think it's that Jerome Powell doesn't understand. Rather the central bank only has a few tools (interest rates/QE) to nudge the economy in the right direction. It takes real policy (Congress and the White House) to direct the investment to the more sustainable long-term investments

[pishpash]

Here is the problem: if Powell is too successful with monetary tools, what incentive does it leave the policy side to do anything at all? He isn't powerless to force policy action by holding the line, but understandably he's more interested in keeping his job.

[naveen99]

> shortage of risk-free assets

Risk free assets don’t exist. So by definition, they are always in short (0) supply. Even treasuries are at currency, inflation, and interest rate risk. If you are using risk free as a synonym for us treasuries , that’s what qe has been pumping into the system. Are you saying you want even more qe ?

[nwiswell]

It's worth noting that the breakeven rate is measuring what market participants are expecting the "official" inflation rate to be, as measured by the CPI-U. That may differ meaningfully from changes in the cost of living as experienced by the average American.

> meaning the real economy could well be full of stuff that destroys value over a 30-year horizon as a norm!

This is probably somewhat hyperbolic since companies who borrow anywhere in the ballpark of the risk-free rate (i.e., large, responsible, and generally financially conservative organizations) typically have an internal hurdle rate that is well in excess of their cost of capital.

What is true is that the hurdle rate exceeds the cost of capital mainly as a risk mitigation mechanism; it is a margin of safety. IRR projections almost invariably depend on certain assumptions about future business conditions. So artificially depressing the cost of capital can result in "more marginal" projects getting the green light, and therefore can increase the potential for financial damage in a serious recession. You can think of it as "risk leverage".