Soaring US real yields lift fixed income appeal
Financial Newswire | August 12, 2026 | Author: Binaya Dahal |
Rising US real yields are improving the case for fixed income, with investors able to earn more attractive inflation-adjusted returns and better relative value to equities after years of unusually low yields, according to Brandywine Global.
Paul Mielczarski, head of macro strategy at the $64.5 billion asset manager, said stronger economic growth and a reassessment of long-term interest rate expectations has pushed real yields higher, creating a more attractive backdrop for high-quality bond investors.
“Real yields approaching 2.5% may represent genuinely attractive compensation for a risk-free asset,” Mielczarski said.
“The spread between the US 10-year real yield and the S&P 500 dividend yield is now at its widest since the early 2000s. Bonds have not offered this kind of relative value versus equities in over two decades.”
Mielczarski noted that US 10-year Treasury yields have risen about 50 basis points since the start of 2026, while the 10-year real yield has climbed towards 2.5%.
He said the move differed from previous bond selloffs because it has been driven entirely by higher real yields rather than rising inflation expectations.
“Despite the sharp rise in energy prices following the outbreak of war with Iran, market-based measures of medium-term inflation expectations have drifted lower,” he said.
“The entire repricing has come through real yields.”
Mielczarski said markets were also reassessing the neutral rate of interest, with investors increasingly pricing a level above official estimate.
“If monetary policy was genuinely restrictive as the Fed estimates suggest, we would expect to see the evidence,” he said.
“Instead, financial conditions are very easy, growth is decent, and credit growth is picking up. The most logical explanation is that the neutral rate is higher than official estimates suggest and the bond market is pricing this accordingly.”
While the repricing has been painful for existing bondholders, Mielczarski said it has materially improved the long-term outlook for fixed income investors.
“The upside is that bond holders can now earn a real return that is competitive with other major asset classes, and with considerably lower volatility,” Mielczarski said.
“In short, rising real yields are not simply a headwind for markets; they are also a signal of a more resilient economy and a meaningful reset in the return potential of high-quality bonds.
“For investors, fixed income once again offers compelling real income, diversification and relative value after years of unusually low yields.”
