10-year Treasury yields have risen by 106 basis points (bp) from a low on 6 October and by 99 bp since a post on 5 November, drawing attention to a warning signal from the Korean bond market.

Yields could consolidate or correct lower following the recent surge; the Korean market has moved sideways since early November. Longer-term investors, however, should note that current levels continue to represent very poor value by historical standards.

The first chart shows 10-year yields, on a quarterly average basis, together with consensus 10-year consumer price inflation forecasts compiled by the Philadelphia Federal Reserve (i.e. from the Philadelphia Fed's Survey of Professional Forecasters since 1991 and from either the Livingston Survey or Blue Chip Economic Indicators for earlier years). Consensus numbers are unavailable before 1979 but can be proxied by an exponentially-weighted moving average of actual inflation.

The second chart shows an estimate of real yields calculated by subtracting the consensus 10-year inflation forecasts (or proxy numbers before 1979) from the quarterly-average nominal yields.

In the first quarter of 2009 and the third quarter of 2010 real yields stood at just 0.3% and 0.5% respectively, well below previous post-war lows of 1.2% in the late 1950s and mid 1970s and 1.1% in 2003.

At the current level of about 3.5%, nominal yields are still only 1.3 percentage points above the consensus 10-year inflation forecast of 2.2%, as reported in the fourth-quarter Survey of Professional Forecasters. To return real yields to their median level of 2.7% since the early 1950s, nominal yields would have to rise to 4.9%, assuming no change in consensus inflation views.