Will bond investors get their tour guide back at Jackson Hole?

The Fed’s diminished forward guidance is leaving bond investors exposed to another real-rate shock, while current Treasury yields already reflect a substantial real term premium.

• In 2011, unemployment was above 9% and five- and ten-year Treasury yields exceeded 2% and 3.25%, respectively, so the Fed used its communications to close the 185-basis-point gap between five-year yields and short-term rates.
• That trade worked: a repo-financed five-year note generated a 42% annualized return when it matured in 2016.
• The pandemic-era repetition of near-zero-rate guidance failed because the 2022–23 rate shock forced investors to account for the Fed’s need to stabilize inflation.
• TIPS bought in January 2021 delivered a 17.4% principal uplift by October 2023, but rising real yields reduced the market value of ten-year TIPS by 25%, showing that inflation protection did not hedge against real-rate risk.
• With forward real yields above 2.5%, diesel shortages, AI-related capital expenditure, weaker foreign Treasury demand and large structural deficits are increasing concern about further upward pressure on rates.

Takeaway: Investors should not assume that Fed communication will again provide a reliable itinerary for fixed income; current Treasury yields are driven more by compensation for real-rate and policy risk than by inflation expectations, although the outlook remains dependent on future Fed actions and economic conditions.