Using Real Yields to Position Fixed Income Portfolios

Two years ago, we introduced our Real Yields model of forward returns in the US bond markets. As of mid-May 2026, following an unexpected spike in interest rates, modeled returns projections are now at their highest point in more than two years.

In the fixed-income markets, we typically talk in terms of “nominal” interest rates. Despite this focus, real yields remain a better tool for evaluating future returns. Janney ISG has built a model of forward return potential based on the tradeoff between cash, inflation, and nominal and real bond yields. While no model can predict the future with certainty, with real yields again at elevated levels, the modeled 12-month forward bond market returns are showing one of the strongest readings of the current cycle. As of May 18, Janney ISG’s Real Yields mode at +8.6% is noting the highest 12-month forward return for the Bloomberg U.S. Aggregate Bond Index since fall 2023, when rates last peaked.

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. Essentially, real yields measure the return on an investment after factoring out the corrosive effects of inflation. By way of example, consider a 10-year Treasury note with a 5% interest rate. If inflation measures 3% over the horizon of that note, the real yield of the hypothetical note is 2%. Real yields, by negating the inflationary impact, arguably offer a better long-term portrayal of an investment’s profitability. Elevated real yields are one factor that signifies strong return potential.

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