Real rates in the US are negative –

We live in a real world and if you look at real rates there is not a strong case for investing in US fixed income. With nominal yields moving lower under the expectation that the Fed will further cut rates and with inflation moving higher, real yields have been plunging. The fall of real yields to negative territory is consistent with the decline in the dollar. Other countries have seen erosion of real rates but the US is leading the pack.

The large divergence between real differential and nominal differentials makes it clear that carry trade analysis has to change. We have not seen the going dispersion of real rates over the last fifteen years so any nominal yield work was sufficient. But, we currently have two effects. One there is growing dispersion in inflation around the world. Inflation volatility increases with rising inflation. Two, there is growing dispersion in nominal rates as different countries pursue different monetary policies. The differences in nominal rate sis not a function of expected inflation. Consequently, there is growing dispersion in real rates.