What are the drivers of real rates?

Nominal = real rates + breakevens

breakeven = inflation expectations and what about real rates = ?

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    $\begingroup$ A big issue in Macro Finance that is not fully understood. According to Irving Fisher real interest rate is determined by tradeoff between "impatience to consume" and "opportunity to invest" or if you prefer supply and demand for savings. Bernanke thought real rates were low because of "savings glut" from China etc. But more research is definitely needed ;) $\endgroup$
    – nbbo2
    Oct 31, 2021 at 12:21
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    $\begingroup$ Add to that Fed policy. So right now US inflation is about 4% but Fed holds nominal short rates at zero. Therefore just by arithmetic , real short term rate is -4%. Longer term real rates can reflect expectations about Fed policy in the future. $\endgroup$
    – dm63
    Oct 31, 2021 at 12:52
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    $\begingroup$ Tricky question. Probably best to ask at economics.stackexchange but the comments are already very good. Questions about economics result in answers that are more often ambiguous than not. $\endgroup$
    – AKdemy
    Oct 31, 2021 at 15:58

1 Answer 1


In the traditional framework, nominal yields represent expectations of nominal growth. If actual nominal > expected nominal, then the future share of pie will rise for savers versus consumers. If actual < expected, then current consumers get more pie.

If then, inflation BEs represent inflation expectations, it logically follows that real rates should represent real growth expectations.

EXCEPT... the recent behaviour of the real and inflation sub-component of yields doesn't intuitively look consistent with economic theory thus. Put simply, higher breakevens appear risk-on more often than not; while higher real appears risk-off. So the stockmarket wants higher inflation and lower growth? Unlikely...

To reconcile this absurdity, you need to abandon traditional textbook thinking. Real rates become the market's estimate for central bank hawkishness, ie bad for asset prices across the board. And breakevens become the market's estimate for the profitable slack left in the economy before the central bank starts to need to worry about inflation returning.

"Inflation" becomes "reflation"; while "real" becomes "taper risk".

  • $\begingroup$ I would agree. So right now 10yr real yields of TIPS are around -1% , whereas most people would say real GDP is likely to be running at 2-2.5% over the same period. This gap of 3% represents Fed policy of ultra easy monetary conditions. In this situation investors do a lot better than savers. $\endgroup$
    – dm63
    Nov 4, 2021 at 4:48
  • $\begingroup$ I would agree. The spread you highlight is precisely the tax on saving from "financial repression". To avoid this (evading would be illegal :-)), you need to accept lower yields = higher multiples on everything else. Which is why SPX is worth double with covid what it was before covid! $\endgroup$
    – demully
    Nov 5, 2021 at 0:14

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