NEW YORK: Bondholders are increasingly willing to be paid less than nothing in the US Treasury market.

       With inflation expectations rising and nominal rates falling this week, so-called real yields on US government securities have dived even deeper below zero.

       The rate on 30-year inflation-protected securities, a measure of real yields over the next three decades, dropped to a record low of around negative 0.5%.

       Such a slide would usually suggest that the bond market has a deeply pessimistic view of economic growth, anticipating that a slowdown would keep rates low in the years ahead.

       But the movements in the world’s largest bond market now are defying such straightforward explanations as the US emerges from the worst economic effects of the pandemic.

       Strategists said the slide in real yields also reflects other factors, such as traders repositioning portfolios and concern in some corners that the high rate of inflation will become ingrained in the economy.

       Jerome Schneider, head of short-term portfolio management and funding at Pacific Investment Management Co, said the downward spiral in real yields is really about ginned up inflation expectations.

       “Bottom line, if you believe that real yields are attractive here, it means that your view is that longer-term inflation stays pretty dang high for a long time,” Schneider said.

       He doesn’t subscribe to that view, predicting that the rise in consumer prices will start to abate in the first quarter of next year. “Real rates will get less negative as inflation gets more in the area that the Fed is more comfortable with.”

       But so far, the bond market is pricing in more inflation risk, not less. Yields on 10-year Treasury inflation-protected securities, or TIPS, have dropped to around minus 1.2%.

       That has widened the gap between those yields and those on normal 10-year Treasuries. That difference, a proxy of inflation expectations known as the break-even rate, has grown to about 2.64%, up from around 2% in early January.

       Such negative real yields aren’t unique to the US, said Subadra Rajappa, head of US rates strategy at Societe Generale, noting that UK 10-year real rates have hit a record low.

       Still, analysts say they have been exaggerated in the US by the Federal Reserve’s Treasury purchases since the pandemic, though that will be less of a factor as the central bank winds down that buying. — Bloomberg