Even lower safe real yields could be a fillip to risky assets

Although we did not expect Treasuries to come under fire after US equities turned a corner in March, we have revised down our previous end-2020, 2021 and 2022 forecasts for the 10-year yield to 0.5%, from 1.0%. This acknowledges both the downward trend in the yield since early June towards its March low of 0.5% amid worries about a resurgence of coronavirus, and signs from the Fed that it may soon strengthen its forward guidance to suggest that it will not raise interest rates until inflation rises consistently above 2%. In such circumstances, we think that real yields of TIPS will fall even further below zero, to the benefit of “risky” assets.