TIPS Signal Rising Real Yields as Treasury Yields Spike

U.S. Treasury yields rose to multi-month highs, with the 30-year yield reaching levels not seen since 2007. At the same time, the five-year breakeven inflation rate derived from Treasury Inflation-Protected Securities (TIPS) fell to about 2.2% and has trended lower since May.

The government bond sell-off began in early March. Two-year Treasury yields have increased about 76 basis points since then. Markets are pricing roughly a 63% probability of a Federal Reserve rate increase in September, according to CME FedWatch. The most recent Federal Open Market Committee meeting coincided with a further rise in longer-dated yields.

Research from on-chain analytics firm Glassnode shows that, at current yield levels, certain government bond investments are more profitable than some crypto cash-and-carry trades for the first time since 2019.

Some market participants have linked the bond sell-off to higher energy prices following the start of the Iran conflict and related disruptions near the Strait of Hormuz. Daily closes of West Texas Intermediate and Brent crude have correlated with two-year Treasury yields at about r = 0.44 since March. West Texas Intermediate briefly traded above $85 a barrel in recent sessions.

TIPS adjust principal with the Consumer Price Index, and the spread between nominal Treasuries and TIPS — the breakeven rate — is used as a market-implied inflation forecast. The five-year breakeven at roughly 2.2% is consistent with a market view of inflation near the Federal Reserve’s 2% target over the medium term.

Nominal yields have moved higher while breakevens moved lower, resulting in higher real yields. Over the five-year segment, the nominal yield rose about 33 basis points while TIPS data imply an 84 basis-point increase in the real yield, partly offset by a roughly 51-basis-point decline in expected inflation.

Analysts point to several factors that could explain rising real yields. One explanation is reserve liquidation and foreign exchange pressures in Asia: some energy-importing countries have intervened to defend currencies and funded interventions in part by selling U.S. Treasuries, which can put upward pressure on yields. HSBC economist Frederic Neumann has previously attributed part of the bond move to such FX-related flows.

A second possibility is that sustained energy price shocks will reduce economic output and curb demand, tightening credit conditions. Investment firms including Neuberger Berman have noted the potential for higher energy costs to weigh on growth and for credit spreads to widen in a weaker growth scenario.

A third factor is increased demand for capital from corporate issuers, particularly large technology firms and companies investing in artificial intelligence. Goldman Sachs projects roughly $755 billion in AI capital expenditure in 2026 and about $920 billion in 2027. UBS has raised its 2026 forecast for investment-grade issuance to $1.8 trillion, with technology firms contributing materially. Greater corporate borrowing increases competition for investor funds with government debt.

Higher real yields reduce the relative returns of non-yielding assets. Glassnode’s analysis indicates that at current yields, some government bond investments can outperform certain crypto carry strategies that were previously profitable.

TIPS data show higher real yields while the five-year breakeven remains near 2.2%, even as nominal Treasury yields have climbed.