Real yield
Also known as: inflation-adjusted yield
Real yield is a 's yield after subtracting the effect of , showing the growth in purchasing power an investor earns rather than just the nominal dollar return.
The formula is:
Nominal yield - rate = Real yieldA yielding five percent when is running at three percent delivers a real yield of roughly two percent, meaning purchasing power grows by about two percent a year after accounting for rising prices.
The distinction matters because a nominal yield alone can be misleading about how well an investment is doing. A high nominal yield during a period of high might still leave an investor worse off in real terms than a lower nominal yield earned during a period of low . Real yield strips out that noise, making it possible to compare returns across different environments on a more consistent basis.
Real yields can be observed fairly directly in the market through , US Treasury securities whose principal adjusts with , whose yields are quoted in real terms already. The gap between a regular Treasury's nominal yield and a of the same maturity is known as the breakeven rate, roughly reflecting what the market expects to average over that period. Real yields are also a key input into how the and economists assess whether monetary policy is restrictive or accommodative, since a given nominal interest rate can mean very different things depending on where sits.