Julian Van Erlach

TIPS: Nominal Yield, Risky Real After-Tax Return

Dear Greg,

Consider that the UK consol during the entire pure gold standard 1820- 1910 - through depressions and wars, exhibited a constant real yield (my article on gold). Supply and demand for long term capital would seem to only clear when both sides agree that the maximum real return after tax that can be earned/paid is ...real per capita productivity growth.

TIPS: Nominal Yield, Risky Real After-Tax Return

Dear Jim - good thoughts. Consider that if untaxed investors were the marginal pricers e.g. charities, foundations - then the current 10 year TIPS yield of just above 2% would be a REAL yield; thus reflecting the required real no tax/after-tax yield. Then the nominal bond should be priced with the same 2% real after-tax yield. However, the real nominal bond after-tax yield based on implied expected inflation is just .5%. This seems to indicate the marginal pricer of both TIPS and nominal bonds is factoring taxation.