Investors focusing on yield need to get real – Chinese government bonds might again be attractive. With US consumer price index (CPI) inflation now far above the nominal yield on the benchmark 10-year US Treasury, the real yield on those Treasuries is deep into negative territory. In contrast, the nominal yield on the 10-year Chinese government bonds remains above the CPI in China. That is a positive real return. China’s official CPI rose 1.1 per cent in June from a year earlier. That was down from 1.3 per cent in May, the National Bureau of Statistics said on July 9. Even after markets had factored in the implications of the decision by the People’s Bank of China (PBOC) to cut the reserve requirement ratio for major commercial banks by 0.5 per cent, which came into effect on July 15, the yield on the 10-year Chinese government bonds was still 2.97 per cent at the end of last week. That offers investors a real after-inflation return. Of course, there is an argument that if China’s post-pandemic economic recovery is moving into a slower phase then, with Chinese CPI well below the targeted 3 per cent growth for 2021, the PBOC has leeway to ease monetary policy further if it deems it necessary. As it is, PBOC monetary policy department chief Sun Guofeng stressed last week that “China’s economy is maintaining good momentum in steady growth at present, the price trend is generally under control ... there is no change in the prudent monetary policy stance”. But even if investors think the PBOC could yet ease policy further , those looking to lock in higher Chinese government bond yields should logically act sooner rather than later as the bond prices would surely rise and nominal yields fall in response. Additionally, Beijing is committed to a stable value for the yuan on the currency markets and aware that some renminbi strength provides a partial defence against imported inflation caused by elevated US dollar-denominated food, energy and raw material prices. Thus, investors could rationally conclude that the risk, that yield gains would be eroded if China’s currency slides on foreign exchanges, is limited. Over in the United States, it is a different ballgame. As Federal Reserve chief Jerome Powell reiterated last week while delivering the US central bank’s semi-annual monetary policy report to Congress, the Fed aims “to achieve inflation moderately above 2 per cent for some time so that inflation averages 2 per cent over time and longer‐term inflation expectations remain well anchored at 2 per cent”. However, US consumer prices jumped 5.4 per cent in June, their biggest rise since August 2008. Neither was there any comfort to be derived from the core CPI, which excludes volatile food and energy price components from the calculation: it surged 4.5 per cent year on year in June, its biggest leap since November 1991. While Powell acknowledged last week that US inflation “has increased notably” and feels it “will likely remain elevated in coming months before moderating”, the Fed continues to characterise these price rises as being transitory and therefore not requiring a monetary policy response. US consumers seem less convinced. US consumer inflation expectations appear to have slipped their moorings rather than being well-anchored. The latest Survey of Consumer Expectations, released last week by the New York Fed, showed that median inflation expectations for the next year had leapt to 4.8 per cent, a rise of 0.8 percentage points from May and the highest reading seen in a data series that started being collated in 2013. That same survey saw median inflation expectations for the next three years unchanged at 3.6 per cent. Why the world should stop worrying about inflation There would appear to be a clear disconnect between these numbers and the Fed’s avowed target for inflation itself and for inflation expectations, yet the US Treasury market seems untroubled. The yield on the 10-year Treasury has been edging lower in recent weeks, trading at around 1.3 per cent last Friday. Perhaps the US bond market buys the Fed narrative and also views upward pressure on US prices as transitory. Perhaps there are other explanations. Either way, once the current US CPI rate is discounted from the nominal yield on the 10-year US Treasury, the real yield is deeply negative. Some investors might be restricted to US Treasuries but, for those who can, it may be an appropriate time to look afresh at Chinese government bonds . Neal Kimberley is a commentator on macroeconomics and financial markets