A plain-English guide to real yields.

US 10Y nominal 4.37%

A nominal yield is what you read off Bloomberg or FRED for a given Treasury. A real yield is what you actually earn on it after stripping out expected inflation. The distinction is the one that drives almost every cross-asset trade that matters: the dollar's rate-differential channel runs through real yields rather than nominal, the cost of capital that businesses face is the real rate, and the policy stance the Fed is implicitly targeting is the real-rate gap against r-star. This is the explainer on what real yields are, how the published measures are constructed, what the current 2 percent US 10-year real yield is telling us, and why today's DXY print at 101 sits squarely on top of the cleanest real-yield differential the dollar has carried in twelve months.

The arithmetic

The Fisher equation defines the relationship:

Nominal yield = Real yield + Expected inflation + Risk premium

Strip out the risk premium (small at the short end, larger at the long end through term-premium contributions) and the nominal yield decomposes into the real yield plus the expected inflation rate over the bond's life. Solve for the real yield:

Real yield ≈ Nominal yield − Expected inflation

With the US 10-year nominal yield at 4.37 percent and the 10-year breakeven at roughly 2.5 percent, the implied 10-year real yield is around 2.0 percent. That is the number a real money allocator earns above inflation by holding the bond to maturity, assuming the breakeven is right.

Two ways to measure real yields

• TIPS-derived. The published yield on US Treasury Inflation-Protected Securities is, by construction, a real yield. The principal is adjusted with realised CPI; the quoted yield is the return above inflation. This is the market-implied real yield and the one Bloomberg / FRED publish daily as DFII10.
• Nominal-minus-survey-expectation. Subtract a survey-based long-run inflation expectation (SPF, Michigan 5-year, NY Fed SCE) from the nominal yield. This is the academic version. It produces slightly different numbers because surveys move differently from market breakevens.

The two measures correlate at roughly 0.85 in the post-2003 sample but can diverge by 30 to 60 basis points in regime transitions. Today's TIPS-derived 10-year real yield sits at about 2.0 percent; the survey-derived version is closer to 1.7 percent (using the 2.8 percent SPF long-run forecast). The difference is the inflation-risk premium investors charge to hold nominal duration relative to TIPS.

The picture

Why real yields drive FX more than nominal

Currencies adjust to differentials in real returns to capital, not nominal returns. A 10-year US Treasury at 4.5 percent nominal is no more attractive than a 10-year JGB at 1.5 percent nominal if expected inflation differentials fully offset the gap. The correlation structure bears this out: DXY correlates with the US-vs-G10 10-year real yield differential at roughly 0.7 over the post-2010 sample, against roughly 0.4 with the nominal differential. Real yields are the cleaner signal.

The 2026 cycle has been textbook on this. Through most of 2025 the US 10-year real yield drifted between 1.7 and 1.9 percent. With last week's hawkish FOMC, the real yield has pushed to roughly 2.0 percent on a sustained close. The US-vs-G10 real-yield differential, plotted against DXY, predicts the current 101 print almost exactly. The dollar's break of 100 and now 101 is not a positioning story; it is a real-yield story.

Where the current real yield places things

A 2 percent US 10-year real yield is not historically high. The pre-2008 average was closer to 2.3 percent; the post-2010 era ran much lower (the 2019-2022 sample averaged just 0.4 percent). The current level represents a return to a regime more like the early 2000s than the 2010s.

Two structural implications:

1. Cost of capital is genuinely higher. A 2.0 percent real yield on the 10-year, paired with a typical 200 to 300 basis-point spread to investment-grade corporates, implies a 4.0 to 5.0 percent real cost of borrowing for blue-chip US firms. That is the highest sustained real cost of capital since 2008. The discount rate the equity market uses to value future cashflows has structurally moved.
2. The structural FX bid is stronger. Real yield differentials at these levels are durable rather than cyclical. The dollar's right-side smile position persists as long as the real yield gap persists. A 30 to 50 basis-point narrowing of the gap against G10 would meaningfully soften the dollar; the mechanical question is whether G10 central banks tighten or whether the Fed cuts. Right now neither looks imminent.

Decomposing a Treasury move into real and breakeven

The single most useful daily exercise for a rates trader is decomposing a nominal yield move into its real and breakeven contributions. The interpretation depends on the decomposition:

• Both up together. A genuine growth surprise. Markets are pricing better real returns and slightly higher inflation; this is the textbook hot-data response. The 5 June NFP moved the curve this way.
• Nominal up, real flat, breakeven up. Pure inflation-shock pricing. Markets are revising the inflation outlook higher but real returns are unchanged. The May CPI read partly this way.
• Nominal up, real up, breakeven flat. A Fed-tightening signal. Markets are pricing more restrictive policy without changing the inflation outlook. This is the canonical hawkish-FOMC signature and is exactly what Wednesday's SEP delivered.
• Nominal up, real up, breakeven down. The most restrictive combination. Real returns rising and inflation expectations falling means the Fed is doing its job with the explicit credibility-cost benefit. The early-1980s Volcker moves looked like this.

What real yields do not tell you

1. The trajectory. A 2 percent real yield can come from many paths: a high-nominal / high-inflation regime, or a low-nominal / low-inflation regime. The level matters, but the decomposition matters more.
2. The real economy impact lag. Real yields affect investment, hiring, and durable-goods consumption with a one- to three-quarter lag. Today's real-yield print is not transmitting to today's GDP print.
3. Whether the breakeven is right. Real yields are calculated from market breakevens, which are themselves an inflation forecast. If the breakeven is wrong, the real yield is mis-measured. The 2022 episode, when realised inflation ran far above breakevens, is the canonical case.
4. The currency-specific real return. A Japanese investor holding US TIPS earns the US real yield minus the expected USD/JPY depreciation. With USD/JPY breaking new highs, the realised cross-currency real return is much higher than the headline TIPS number; that is the carry trade the Monday session reinforced.

Related reading

• Today's analysis applies this directly: DXY hits 101. Asia tests MoF's resolve.
• The breakeven companion: A plain-English guide to inflation breakevens
• The r-star piece: A plain-English guide to r-star
• The carry-trade context: A plain-English guide to the carry trade