Using Real Yields to Position Fixed Income Portfolios

In the fixed-income markets, we typically talk in terms of “nominal” interest rates. Despite this focus, real yields are a better tool for evaluating future returns. Janney ISG has built a model of forward return potential. While no model can predict the future with certainty, with real yields at current levels, the modeled 12-month forward bond markets returns are showing one of the strongest readings in the last decade.

News articles, financial media networks, and even fixed-income traders rely on “nominal” yields in discussing the bond markets. Nominal rates represent the yield promised by an investment instrument, like a bond or savings account, without factoring in the impact of changing purchasing power over time. Nominal interest rates serve as a fundamental metric for evaluating the attractiveness of investment opportunities, offering investors a baseline figure to assess potential returns. However, to grasp an investment's true profitability amidst fluctuating inflationary pressures, they require more context. Real yields can provide some of that context.

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