Treasury Yields Rise as Real Rates Supplant Inflation Narrative

US Treasury yields have been rising since the start of the Iran war, which some attribute to inflation expectations caused by energy prices. However, data from Treasury Inflation-Protected Securities (TIPS) suggests that the real story is a rise in real yields.

The five-year breakeven rate, which estimates the expectation of future CPI inflation, has been moving in the opposite direction to nominal treasury yields. While the five-year nominal yield rose 33 basis points since May, TIPS data shows this was the result of an 84 basis point rise in real yields.

This means that investors expect the Fed to achieve its 2% target in the medium term. The rise in real yields has been accompanied by a decline in expected inflation, from 2.5% to 2.2%. This contradicts the popular narrative of inflation-driven bond yields.

The implications for crypto are bearish, as rising real investment returns make non-yielding assets like Bitcoin relatively less attractive to certain investors. The explanation for higher real rates depends on the scenario, which could include reserve liquidation due to FX pressure or demand destruction from an oil shock triggering a recession.