The Three Treasures of Interest Rates Today I am studying interest rates. There's no other way, for the sake of stocks, I have to pick up the textbooks from back then. It's boring here, but we still have to learn hard, which is an unavoidable skill in investing in stocks. Usually looking at interest rates, ordinary retail investors prefer to look at nominal interest rates. Professional investors, on the other hand, look at real interest rates. There is a logical identity here, Nominal interest rate=real interest rate+expected inflation rate Reflected in the financial market, we can see 10-year ordinary US Treasury yield=10-year TIPS real yield+10-year breakeven inflation rate This is the Three Treasures of Interest Rate. Today we will focus on the real rate of return: After deducting future inflation compensation, investors can obtain the real annualized yield when they buy 10-year US inflation protected treasury bond bonds. For stocks, especially growth stocks, AI stocks, and technology stocks, real interest rates are more critical than nominal interest rates. Products that reflect the true rate of return: Example: Treasury Inflation Protected Securities The core of the 10-year TIPS product design is: The coupon rate is fixed, but the principal will be adjusted upwards or downwards according to changes in inflation. Interest=Fixed coupon rate x Adjusted principal. What's amazing is: TIPS uses the US CPI-U inflation linked index, which is the US city consumer price index, rather than a complex financial derivative synthesis. This is counterintuitive. If the CPI accumulates a 5% increase after one year, the principal of TIPS will be adjusted to: Adjusted principal=100 × 1.05=105 Interest=105 × 2%=2.10 The increased principal amount will be directly disbursed by the Ministry of Finance. By the way, this thing is really awesome. The US Treasury Department has unexpectedly released a product that makes it easy for ordinary people to resist inflation. Countless ordinary people who have invested their entire lives in cultivation have been unable to achieve it They were born with it. To summarize: TIPS actual rate of return represents the true risk-free rate of return. The actual yield of 10-year TIPS is the "real risk-free rate after deducting inflation" given by the market. The higher it is, the higher the real cost of capital, and the less friendly it is to overvalued growth stocks; The lower it is, the less pressure on the valuation of growth stocks. The rise in real interest rates can also be understood as a decrease in market concerns about inflation. There are fewer people buying tips to combat inflation. It may also be due to optimism about economic growth. Scenario 1: nominal interest rate increase=real interest rate increase Ordinary US Treasury yield ↑ TIPS actual yield ↑ Breakeven remains unchanged or decreases This is the most unfriendly situation for stocks. The meaning is: The real cost of capital is rising Discount rate increases Tightening liquidity As shown in the figure, from the end of 2021 to 2022, real interest rates fell sharply under QQ Scenario 2: An increase in nominal interest rates=an increase in inflation expectations Ordinary US Treasury yield ↑ Breakeven ↑ TIPS actual yield remains unchanged or slightly changes This is not the worst-case scenario, but it will suppress the overvalued sector. Scenario 3: Real interest rates rise, the economy is strong, and at the same time, the US stock market is rising In 1999, it was a typical case of 'interest rates rising but US stocks skyrocketing'. Scenario 4: Real interest rates fall while US stocks fall Then the market expects a recession It's the disappearance of economic momentum What about the situation where ordinary people are weak and powerless, losing hope and fighting spirit I won't say much here