SINGAPORE – With interest rates on ten-year US Treasuries close to 5%, more than triple the levels of two years ago, bond yields are attractive once again. If the fundamental factors driving them haven't changed dramatically, then it's possible that interest rates will fall and bond prices will recover now that the inflation scare has passed.

The last two years have been catastrophic for investors in US Treasury bonds. By one measure, 2022 was the worst year for such investors since 1788. Bond prices are poised to fall again in 2023, making this the first time in US history that they declined for three consecutive years.

But now the "smart money" is jumping back in. With interest rates on ten-year Treasuries close to 5%, more than triple the levels of two years ago, yields are attractive. If the fundamental factors driving them haven't changed dramatically, then it's possible that interest rates will fall and bond prices will recover now that the inflation scare has passed.

That's a big if, of course. But consider those fundamentals. The interest rate on bonds should reflect the underlying natural, or neutral, real rate of interest, plus expected inflation over the holding period. A range of measures shows inflation to be running at about 3%, belying warnings of a period of chronic high inflation that drastically exceeds the Federal Reserve's 2% target. The "breakeven rate" on inflation-indexed Treasury securities similarly points to expected inflation below 3% over the next ten years.

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Barry Eichengreen, Professor of Economics and Political Science at the University of California, Berkeley, is a former senior policy adviser at the International Monetary Fund. He is the author of many books, including In Defense of Public Debt (Oxford University Press, 2021).