Little scope for further increases in real yields. TIPS are an attractive investment opportunity.
US real yields have recently risen to levels last seen in 2008 . Some have argued that one of the factors explaining the speed and magnitude of this increase is the surge in AI - related capital expenditure. On the one hand, stronger investment demand is intensifying competition for capital. On the other, the prospect of an AI -driven technological revolution is raising exp ectations of higher potential economic growth.
In this report , we analyse the role of investment and total factor productivity in driving real yields since the 19 50s , placing the recent increase in real yields in a historical context. We find that:
1) Higher investment places upward pressure on real yields. Since the start of 2025, increased investment has been one of the main drivers of rising real yields.
2) Real yields are already trading well above the levels implied by macroeconomic fundamentals. Moreover, historical experience suggests that the scope for further increases is limited. In particular, drawing on the experience of the
information and communications technology (ICT) revolution in the late 1990s, we estimate that real yields have at most a further 30 –40 basis points (bp) of upside potential .
3) In line with the academic literature, total factor productivity (TFP) has an ambiguous effect on real yields. On the one hand, higher TFP can push real yields upwards by increasing potential economic growth. On the other, productivity gains can exert disinflationary pressu re, potentially leading to lower real yields if central banks adopt a more dovish monetary policy stance. Therefore, even if TFP were to increase as a result of advances in AI (a
significant uncertainty), this would not necessarily translate into higher real yields.
Against this backdrop and considering that inflation breakeven rates imply a historically low inflation risk premium, we view Treasury Inflation -Protected Securities (TIPS) as an attractive investment opportunity .
A word of warning: Our analysis focuses on the impact of investment and TFP on real yields, while excluding potential shocks to other variables that could influence them, such as a further sharp widening of the fiscal deficit or a significant acceleration in inflation that would prompt the Federal Reserve to embark on a monetary tightening cycle (neither of which forms part of our baseline scenario).
Chiara Cremonesi
Senior Rates Strategist
Mattia Banin
Junior Macro Analyst
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