When it rains it pours. After writing about inflation and real yields recently we came across a couple of academic papers that directly address the nature of real yields. These papers will be of interest to those looking to delve deeper into the fundamentals of the topic.
Forthcoming in the Journal of Finance is an article by Andrew Ang, Geert Bekaert and Min Wei, entitled “The Term Structure of Real Rates and Expected Inflation.” In it they present a model of the term structure of interest rates that includes a relatively flat term structure of real interest rates and an upwardly sloping inflation risk premium. The paper is an interesting deconstruction of the yield curve using an intuitive set of descriptors.
Barry Barnitz at Financial page points to a paper by Andrew J. Swinston and Tamim Bayoumi at SSRN.com entitled “The Ties that Bind: Measuring International Bond Spillovers Using the Inflation-Indexed Bond Yields.” In it they show that real yields across countries are “closely linked” and driven in large part by movements in U.S. real yields. This paper is a nice counterpoint to the earlier one in that it takes a global perspective on real yield movements.
We hope this provides some additional background on the nature of real yields.