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10yr-3mo Treasury Spread and TIPS 10yr

Summary:
Figure 1 shows both of these at monthly frequency, with February data through 2/21. It could be argued that the 10yr-3mo spread is reduced due to a compression of the term premium, as deflation becomes a larger concern. The 10 year TIPS yield should not be susceptible to this sort of effect, so the fall in the real yield is worrisome. Even if the trend in the real rate is downward due to demographics, etc., this latest drop since late 2018 seems cyclical.

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Figure 1 shows both of these at monthly frequency, with February data through 2/21.

10yr-3mo Treasury Spread and TIPS 10yr

It could be argued that the 10yr-3mo spread is reduced due to a compression of the term premium, as deflation becomes a larger concern. The 10 year TIPS yield should not be susceptible to this sort of effect, so the fall in the real yield is worrisome. Even if the trend in the real rate is downward due to demographics, etc., this latest drop since late 2018 seems cyclical.

Menzie Chinn
He is Professor of Public Affairs and Economics at the University of Wisconsin, Madison

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