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U.S. real yields: Is the trend turning downward?
05/09/2025
Whether or not there will be a reversal in the trend depends on the development of long-term inflation and whether the Federal Reserve manages to maintain its credibility.
U.S. real yields have always been an important indicator for financial markets. Currently, they appear to be pointing to an interesting development once again. While nominal U.S. yields have fluctuated considerably in recent years, the real yield derived from inflation-protected U.S. government bonds (TIPS) has generally offered a clearer indication of the underlying forces at play.[1] Since the beginning of 2022, the trend has been clear. The 10-year real yield has risen from negative levels to well above 2 percent, driven by the U.S. Federal Reserve's (Fed) aggressive tightening campaign. This rise continued dynamically until autumn 2023, followed by a volatile sideways trend in which real yields fell several times, though not enough to turn into a sustained downward trend. Since the beginning of 2025, a downward trend has emerged again, despite the fact that the Fed has not yet been particularly aggressive in its interest rate cuts.
Two factors are decisive. Firstly, markets expect the Fed to ease key interest rates more sharply in the coming months than was anticipated at the end of 2024. This is due to a cooling economy, the lack of any significant impact on inflation rates from President Trump's tariffs, and the first signs of a cooling labor market. Secondly, as can be seen in our Chart of the Week, the term premium has fallen again since its peak in January. This risk premium, which investors demand for holding long-term bonds, initially rose in response to high issuance volumes and fiscal uncertainties but has recently eased noticeably. However, structural factors such as growing government debt and geopolitical risks could prevent it from remaining lower in the long term.
Discrepancy between inflation expectations and real yields in the U.S.
* Measure of expected inflation (on average) over the five-year period that begins five years from today.
Sources: Bloomberg Finance L.P., DWS Investment GmbH as of 9/2/25
Against this backdrop, the Fed is faced with a challenging task. As Christian Scherrmann, U.S. economist at DWS, sums it up: “In view of the risks posed by tariffs, the Fed must ease monetary policy without losing control of long-term financing costs.” The development of the labor market appears to be decisive, regardless of political factors. Nevertheless, the political dimension is currently quite relevant. In the U.S., some prominent voices have sounded the alarm regarding the independence of the Federal Reserve. A central bank too much under political control might face the risk of losing its credibility in the future. A loss of confidence of this kind would tend to increase risk premiums at the long end of the yield curve and make it even more difficult to steer broad financing conditions.
In our view, the current decline in real yields indicates that investors expect weaker real growth. Falling real yields often point to a more subdued economic outlook, as investors anticipate lower real returns and increase their demand for perceived safe investments.
The latest developments could therefore signal a new phase, moving away from concerns about persistently high real interest rates towards cautious normalization. Whether this marks the start of a sustained trend or merely an interim correction depends on future inflationary trends and the credibility of central bank policy. One thing is clear, however: those who ignore real yields are overlooking one of the most important drivers of valuation in many asset classes.