A nominal Treasury yield is the sum of two things: the real yield and the market’s expected inflation over the same horizon. TIPS let you see those two pieces separately.
A regular 10-year Treasury pays a fixed coupon and returns face value at maturity. A 10-year TIPS (Treasury Inflation-Protected Security) adjusts its principal upward with CPI each month, then pays a fixed real coupon on the adjusted principal. When CPI runs hot, the TIPS holder gets more back. That is why a TIPS yield is called a real yield. The coupon is set in inflation-adjusted terms.
Subtract the 10-year TIPS yield from the 10-year nominal Treasury yield and you get the 10-year breakeven, the market’s average expected CPI over the next decade. A 4.20 percent nominal minus a 2.00 percent real gives a 2.20 percent breakeven. Do the same math at the 5-year point and you get the 5-year breakeven. The 5y5y forward (the market’s implied 5-year inflation starting five years from now) is built from those two.
Why the real yield matters more than the nominal for most decisions. A company deciding whether to build a factory compares its expected real return on capital to the real cost of debt. Inflation compensation cancels on both sides of that trade. The Fed’s transmission runs through real yields too: nominal rates can be cut while real yields rise, if inflation expectations fall faster than the funds rate. That is tighter policy, not easier. Cross-country rate comparisons only make sense in real terms. A double-digit Turkish lira yield tells you nothing about the real cost of capital in Turkey without the inflation context.
Nominal is still the right lens for a few things. Mortgage payments, corporate coupon expense, credit card balances, and any debt priced against a nominal benchmark all settle in nominal dollars. The borrower writes a nominal check, so the nominal yield is what shows up on the invoice.
The 10-year real yield spent most of the 2010s below 1 percent and briefly went negative in 2020 and 2021. It broke above 2 percent in 2023 and has stayed there. Whatever the nominal number does on any given day, the real yield is the one that tells you what money actually costs the productive economy.
Two ways to watch it: FRED series DFII10 (10-year TIPS constant maturity) for the real yield itself, and T10YIE for the 10-year breakeven. Both update daily.