Expected path
The average one-year gilt yield the model expects over the ten years.
Inside the Yield
Expected real rate
The part of the expected path that is left once expected inflation is taken out.
A ten-year gilt's yield splits into the average one-year yield the model expects over the decade, and a term premium for locking the rate instead of rolling one-year gilts. That expected average is itself two pieces. Expected inflation is the path of prices. The expected real rate is what remains.
It is a real return only if inflation arrives as assumed and the investor rolls one-year gilts along the path. It is not a forecast of Bank Rate. The short rate in the model is the one-year gilt yield, so a little of the short gilt's own premium sits inside this path.
The inflation path is today's 2.5-year breakeven until February 2030, when RPI is due to take on CPIH's methods, and then a fade toward the 2% target. A different path moves this piece by the same amount in the other direction. The prices do not choose the path. How the model gets the expected average, before this split, is on Inside the Yield.
minus expected inflation
The path of prices allowed for in the split.
Expected real rate
What remains after that inflation path is taken out.
r* is the real short rate the economy would settle at if inflation were on the 2% target and output were at capacity, with nothing pushing either of them. It is an equilibrium, inferred rather than printed. The things that pull it are how fast productivity grows, how large the labour force is, how much is saved against how much is invested, how much the government is borrowing, and the real rates on offer abroad. Researchers put the resting point in different places. This page does not choose a number for it.
The 1.0% on this page can sit away from r*. Ten years of expected one-year yields include the journey back toward that resting point, and they include whatever premium is already inside the one-year gilt. A higher r* pulls this piece up. r* is not itself a slice of the ten-year yield.
Inputs to r*
Productivity and labour
How fast the economy can grow.
Saving and investment
Who wants to lend, and who wants to borrow.
Government borrowing
The public sector's claim on saving.
Real rates abroad
Where the world's saving can go.
Real-rate term premium
The term premium on Inside the Yield is the whole gap between the ten-year yield and the expected average of future one-year yields. That gap is the extra yield for fixing a rate for years instead of rolling one-year gilts. Three things sit in it here: the inflation risk premium, gilt over swap, and this residual.
This piece is compensation for uncertainty about real rates. It is also the remainder of the allocation, so it inherits the inflation path and the decision to keep the swap spread as its own slice. A different path moves this number. Because it is a remainder, the five pieces still add up to the yield.
Along the whole curve, rather than at this one maturity, the same residual is the purple band on the chart at the bottom of The Curve. In that stack it sits under gilt over swap.
The next piece is gilt over swap: the gilt's yield over the overnight-index swap of the same length.