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In Real Squeeze, -1% Guaranteed Real Real Return! Yummy??, and Historical Sources of Bond Returns, I offer some historical perspective on the only sources of bond returns: inflation, real returns, and credit. Assuming no credit risk in US Treasuries (probably not a good assumption given this Bloomberg quote on CDS on US Treasuries), the formula is fixed, and all inputs except inflation are provided ex-ante. While bond prices can fluctuate wildly (Extreme Bond Returns), the experience over the life of a bond and a bond index is predetermined by the yield to maturity. Unfortunately, that guaranteed experience in inflation or deflation is not so pleasant.

While everyone should know R, I understand that some readers would prefer an easier route. FRED as usual comes to the rescue. Unfortunately though, labeling is not allowed. The codes can be translated as follows:

DBAA = total return on BAA

DBAA – (DGS10 – DFII10) = credit return

DGS10 – DFII10 = inflation (expected)

DGS10 = real return

In the spirit of continuous improvement, here is the chart now using lattice and latticeExtra.