May 6, 2002; Real Yield Drops Sharply

One of the best performing investments in 2002 aside from natural gas stocks is the U.S. Ten Year Inflation Indexed Note where the real yield has declined from 3.54% per year to 3.09% (see chart).  A hundred dollars in TIPS at the beginning of the year would be worth a bit more than 105 dollars today plus interest and inflation adjustment.  That is the change in principal value implied by the change in yield.

The real yield is probably the most fundamental measure of investor expectations to which all other measures can be related.  The willingness for investors to expect (accept) a lower real return probably reflects less confidence in prospects for economic growth.  At the same time we have just come through a period of high growth that increasingly seems to have masked many excesses including too much financial leverage.  Thus with less growth to make everybody look good, more weak players may be exposed.  Some of the high debt stocks in our coverage have already suffered mightily.  Our current sell recommendations are ripe candidates for sharp stock price decline (see chart).