Glossary / Markets

Real yield

Real yield is the return on a bond after inflation, observable directly in the market as the yield on an inflation protected government bond, and it is the hurdle every other asset has to beat to be worth owning.

A nominal yield of 4.70 percent with a real yield of 2.38 percent means roughly half the nominal is compensation for expected inflation and roughly half is genuine return.

A positive real yield raises the opportunity cost of holding anything that pays no income, which is the textbook argument against gold.

Where people get it wrong

Comparing a nominal yield against a real return, or vice versa. Both are commonly quoted and mixing them produces an answer that is wrong by the inflation rate.

Related terms

Breakeven inflation Breakeven inflation is the difference between a nominal government bond yield and the real yield on an inflation protected bond of the same maturity, and it is read as the inflation rate the market expects over that period. Yield curve The yield curve plots the yields of government bonds against their maturities, showing what the market charges to lend for two years against ten or thirty, and its shape is read as a statement about growth, inflation and risk. Term premium Term premium is the extra yield investors demand for holding a long dated bond rather than rolling short dated ones, compensating for the uncertainty of committing money for decades.

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