Take the yield and subtract inflation:what's left is the real compensation.
The return on a bond after subtracting expected inflation.
Real yields are commonly watched alongside gold, which pays no interest: when the inflation-adjusted return on bonds rises, the opportunity cost of holding gold rises with it.
In plain words
A bond’s stated yield, called the nominal yield, takes no account of rising prices. The real yield is what remains after expected inflation is subtracted: roughly, how much more a saver’s money is expected to buy at the end.
real yield ≈ nominal yield − expected inflation
See it move
Nominal yield: the largest here
Why it matters
Real yields allow the return on a currency’s bonds to be compared with assets that pay no interest, such as gold. They are commonly watched alongside the gold price and the US dollar, though those relationships are not constant.
Worked example
An example only. The figures are round and invented for the arithmetic: they are not market prices.
A bond yields 5% a year and inflation is expected to be 3% a year.
- 1Real yield5% − 3% = about 2%.
- 2Suppose expected inflation rises to 6% while the bond still yields 5%.
- 3Real yield5% − 6% = about minus 1%.
The same 5% bond offers a positive real yield in the first case and a negative one in the second.
A common mistake
A high nominal yield does not mean a high real return. A bond paying 10% where inflation is expected to be 12% has a negative real yield.
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Educational information, not investment advice or a recommendation to trade.