Even if cash flow considerations favor unindexed debt, rough estimates of the tax effects on the difference between real and
nominal yields are calculable for the average investor, and hence approximate adjustments can be made.
Treasuries (Treasuries) as break-even spreads (the difference between 10-year
nominal yields and 10-year U.
Short-term bond yields were also strong, but long-term
nominal yields fell due to lower inflationary expectations.
Third, term structure models assume stationarity for
nominal yields.
But for now the spike in
nominal yields has created an unfavourable environment.
In bond markets,
nominal yields have started to rise in the developed world but could go much further - real yields still average just 0.
Even nontraditional investors, such as foreigners who can't benefit from the tax-exempt status of most munis, are attracted to the muni market because of relatively high
nominal yields compared to those of overseas, said Thomas Casey, senior portfolio manager, Tax-Sensitive Strategies at Standish Mellon Asset Management.
Additionally, as Haubrich, Pennacchi and Ritchken (2012) claim, real yields on ILBs can be derived as the difference between equivalent maturity
nominal yields and inflation swap rates, and these synthetic real yields are less prone to uncertain changes in liquidity than TIPS yields.
Indeed, about $6 trillion worth of government bonds around the world today have negative
nominal yields.
Meanwhile, the ECB is expected to introduce additional unconventional measures to drive rates in the opposite direction, even if that means putting further downward pressure on some government bonds that are already trading at negative
nominal yields.
We focus on forecasts of the quarterly average level of 7 different interest rates: the federal funds rate and the
nominal yields of Treasury securities at 6 different maturities between 3 months and 10 years.
Adrian Hartshorn, Senior Partner in Mercer s Financial Strategy Group said, Although the improvement in
nominal yields is welcome, any decision to lock into historically low yields by hedging at current levels requires careful consideration, and should be balanced against other hedging opportunities.
