Atlas Macro

Fixed Income

Real vs Nominal Rates: How Yields Affect Valuations

A 5% interest rate sounds generous, unless prices are rising 6% a year. The rate that matters for savers, borrowers and investors is the real rate: what is left after inflation. This explainer covers the difference, how markets measure real yields, and why they move share prices and gold.

4 min read · Figures checked October 2026

1. Nominal and real

Suppose you lend £100 for a year at 5%. You get £105 back. If prices rose 3% over the year, your £105 buys only about as much as £102 did a year earlier: your real return was about 2%. If inflation had been 7%, your real return would have been negative, even though you earned 5% on paper.

The same applies to wages (a 4% pay rise with 5% inflation is a real pay cut), to GDP (economists strip out price rises to see how much more was actually produced), and to investment returns.

2. How markets measure real yields

The US Treasury sells inflation-protected bonds (TIPS), whose principal rises with CPI. Their yield is a real yield. Comparing it with an ordinary Treasury of the same maturity gives the breakeven inflation rate, the market's implied inflation forecast. The UK has issued index-linked gilts since 1981.

10-year real yield, 2021
~ −1%
Near-zero rates, rising inflation
10-year real yield, Oct 2023
~ +2.5%
Highest since 2007
Change
3.5 pts
One of the fastest rises on record

3. Why real yields move valuations

A share is worth the present value of the profits it will produce. To compare future money with money today, investors discount it at a rate built on the real yield, plus a premium for risk. When the real yield rises, every future pound is worth less today, and the effect grows with time: profits 20 years away lose far more value than profits next year.

  • Growth shares, valued mostly on distant profits, are the most sensitive. In 2022, as the 10-year real yield rose by more than 2.5 points, the tech-heavy Nasdaq fell about a third.
  • Gold pays no interest, so when real yields rise, the cost of holding it instead of a bond rises. Gold and real yields moved in opposite directions for most of 2006–2021.
  • Property is valued on rents, so higher real yields tend to lower property values.

When the old link broke

From 2022 real yields rose sharply, yet gold went on to record highs above $4,000. Heavy buying by central banks, diversifying away from the dollar after Russia's reserves were frozen, overwhelmed the usual relationship. Market relationships are tendencies that hold until something bigger changes.

4. Negative real rates

From 2009 to 2021 real yields were often below zero: savers lost purchasing power even on "safe" bonds. That pushed money into shares, property and riskier credit in search of a return, one reason asset prices rose so strongly in that period. When real yields turned positive again in 2022, that support went into reverse.

Key takeaways

  1. 1Real rate ≈ nominal rate − expected inflation.
  2. 2In the US, real yields are quoted directly on inflation-protected Treasuries (TIPS).
  3. 3Higher real yields lower the present value of future profits, hitting fast-growing companies hardest.
  4. 4Gold, which pays nothing, has historically tended to fall when real yields rise, though that link weakened after 2022.
  5. 5Very low or negative real yields push investors towards riskier assets in search of return.

Related

Educational content only. It describes how markets have behaved in the past and is not investment advice.

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