The ten year has been yielding about parity with this years CPI.
Certainly fixed income investors risk negative real returns if inflation continues to accelerate. On the other hand what if this uptick in prices is just a cyclical event in a macro global deflationary trend? Or what if this is the true meaning of stagflation? i.e. A glut of labor consuming too few natural resources.
At the end of the day markets are still supply vs. demand. It's easy to say one doesn't want to accept a lower yield than the rate of inflation but what if no other traditional investment vehicle produces positive returns? In other words if you knew, hypothetically speaking, that stocks were absolutely going lower then you would accept any fixed income return. Even if that return was lower than the rate of inflation. After all in a bearish equity envronment, one cares most about protecting principal.
Clearly the utopian solution for pension funds would be diversification into asset classes that include commodities like oil and metals. But much like the mid 1970's we may be entering a phase where both stocks and bonds will offer negative returns in constant dollars.
