Heads-up for my Danish-speaking readers: The Danish edition of my book How Low Interest Rates Change the World will be released in just over two weeks: https://djoefforlag.dk/products/rentefald. Naturally, I’ll share the key takeaways with you once it’s out.
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Today’s analysis: In standard economic models, real interest rates influence firms’ and households’ intertemporal saving and investment decisions. When real interest rates rise, consumption and investment fall, as saving becomes more attractive, while borrowing and investment become more costly. What, then, do recent movements in real rates suggest for the outlook? In short, they bode well for saving but poorly for investment.
Yields on inflation-indexed bonds reflect yields in real terms—that is, the yield investors obtain over and above the rate of inflation. From the yields on bonds of different maturities, we can derive implied forward yields, as I explained in a previous post (link). Under certain assumptions, these market-implied forward rates provide an approximation of expected future rates.
Figure 1. Yield on ten-year US Inflation-Indexed Treasuries (10y), ten-year forward real interest rates in ten years (10y10y) and ten-year forward real rates in twenty years (20y10y). 2023–August 2025. Source: St. Louis FRED and J. Rangvid.
Figure 1 illustrates this for US data, showing developments since 2023 in the 10-year real Treasury yield, the implied 10-year real yield ten years ahead (10y10y), and the implied 10-year yield twenty years ahead (20y10y). I begin the series in 2023, when the post-pandemic inflation surge had eased back to its current, though still elevated, level.
Ten-year real yields have been broadly stable over the past two years. In late 2023, they stood at about 2%, and they remain close to that level today.
By contrast, market-implied future real yields have risen noticeably. The 10-year real yield expected ten years from now is around 3%—one percentage point higher than two years ago and roughly 1.5 percentage points higher than in early 2023. The same increase is evident for the 10-year real yield expected in twenty years.
The key point, thus, is not simply that market-implied forward yields exceed current yields—that is typical given an upward-sloping yield curve. Rather, the point is that expected yields have risen by more than current ones, signalling higher future real yields.
These shifts represent a substantial rise in long-term real yields expectations. Indeed, the increase is so pronounced that expected real yields are now at their highest levels since 2010, as shown in Figure 2.
The 10-year real yield expected twenty years from now currently stands at 3.1%, surpassing its previous high of 2.7% in early 2011. A similar pattern holds for the 10-year real yield expected ten years ahead, which is now 2.8% compared with its 2011 peak of 2.5%.
Figure 2. Yield on ten-year US Inflation-Indexed Treasuries (10y), ten-year forward real interest rates in ten years (10y10y) and ten-year forward real rates in twenty years (20y10y). 2010–August 2025. Source: St. Louis FRED and J. Rangvid.
Market-implied inflation expectations, by contrast, have remained relatively stable. Investors continue to expect inflation to stay close to the 2% target, particularly for the 10-year horizon in twenty years (20y10y), as shown in Figure 3. Expectations for inflation over the next ten years and 10-year forward inflation (10y and 10y10y) are slightly higher, but have also not moved much during the past couple of years.
Figure 3. Expected inflation over the next ten years, twenty years from now (20y10y). 2% target indicated by dashed line. 2010–August 2025. Source: St. Louis FRED and J. Rangvid.
When inflation expectations remain stable but real yields rise, nominal yields inevitably move higher as well. In other words, the recent increase in long-term nominal yields reflects higher expected future real yields rather than a shift in expected inflation.
UK
This is not just a US phenomenon. The same pattern is evident in the UK, where we also have data on real yields across different maturities that allow us to derive implied forward yields. Figure 4 plots the 10-year UK real yield, the 10-year yield expected ten years ahead (10y10y), and the 10-year yield expected twenty years ahead (20y10y).
Figure 4. Yield on ten-year UK Indexed-linked Gilts (10y), ten-year forward real interest rates in ten years (10y10y) and ten-year forward real rates in twenty years (20y10y). 2023–August 2025. Source: Datastream via Refinitiv and J. Rangvid.
If anything, the picture is even clearer for the UK than for the US, given how low UK real yields were before the pandemic. Back in 2010, long-term UK real yields—both current and market-implied future yields—ranged between 0% and 1%. In 2014, they had turned negative. In 2022, 10-year real yields stood at -3%, meaning somebody investing in a 10-year inflation protected bond at that time was willing to accept a negative real return of minus three percent per year for the next ten years – a remarkable situation.
Today, real yields stand between 1.6% and 3%. This represents a substantial increase across both current and expected future real yields.
More countries
For other countries, data on long-term inflation-protected bonds are less comprehensive than for the UK and the US. Still, we can track developments in current 10-year real yields for e.g. France and Germany. These are shown in Figure 5, alongside the corresponding yields for the UK and the US.
Figure 5. Yield on ten-year inflation-indexed bonds in Germany, France, the UK, and the US. 2011–August 2025. Source: St. Louis FRED and J. Rangvid.
US 10-year real yields remain the highest, at 1.8%, but those in the UK and France are catching up quickly. German yields have been more stable, though they too are now at their highest levels since 2011. In contrast, Japanese real yields (not shown) have remained stuck around zero for the past decade.
Implications
Long-term real yields—both current and market-implied forward yields—have risen markedly since 2022. By definition, long-term yields reflect the average of current and expected future short-term yields, plus a risk premium. Research from the Federal Reserve Bank of Cleveland (link) suggests that US real risk premia have remained broadly constant over many years. Accepting that, and expecting it to continue, the sharp rise in real yields since 2022 reflects higher expected future short-term real rates and not a higher risk premium.
No one can be certain whether current market expectations will be realised. Figure 2 shows US real yields moving toward the 3% mark—an unusually high level. Yet, the US central bank sees things differently. According to the Fed’s Dot Plots, Fed Governors expect the long-run Fed Funds Rate to settle near 3%. If inflation meets the Fed’s 2% target, this implies that policymakers themselves anticipate real rates closer to 1%.
The difference between real rates at 1% or 3% is large. However, should markets prove correct and real rates continue to rise, the consequences will be profound:
- Governments with weak fiscal positions—notably France, the UK, and the US—will see their debt burdens grow faster than projected, worsening already fragile public finances.
- Corporations planning to invest will face higher financing costs. Some may scale back or delay projects, which could dampen investment and weigh on future economic growth.
- Savers, by contrast, will benefit. After years of negative real rates, current and expected future real yields are positive again, making safe assets more attractive than they have been in over a decade.
