Geoff Cornell and Eric Winograd link higher long yields to real rates

Geoff Cornell and Eric Winograd argue in an Oct. 16 Insurance AUM Journal piece that higher long-term government bond yields reflect real yields, not inflation expectations. Cornell holds the chief investment officer—insurance title and Winograd is chief US economist. Breakeven inflation rates are steady even as real bond yields have climbed, they write. They call the timing unusual: US long rates rose while the Fed was cutting policy rates, part of a sharp rise in long-term rates globally.

They reject an inflation explanation. Price growth is sticky and above target but not running away, they write, and much of it stems from global shocks from COVID through the Iran conflict. Tightening does not address those shocks, and the authors see no case for a prolonged tightening cycle. The market appears to agree with that assessment, they add.

Technology investment has surged as a share of GDP, and AI-related spending is forecast to keep rising. The authors expect a manufacturing rebound to follow — not directly from AI capex, they write, but because the things that capex pays for have to be built somewhere. Productivity underpins the case: below 1.5% for most of the past 15–20 years, it has edged closer to 2% over the past two and a half to almost three years.

The mechanism runs through the neutral rate, the level of interest rates that should prevail over the long run. In their account, faster growth implies a higher neutral rate, and they suggest it may be higher than policymakers have assumed — which would mean rates settle higher over time rather than drifting back.

For insurers, the authors frame the implication this way: if their decomposition is right, the extra yield is real return rather than compensation for expected inflation erosion. That matters for a general account assembling long-dated cash flows. A higher neutral rate cuts both ways: it lifts the yield at which maturing assets get reinvested and raises the rate at which future liabilities are discounted. The authors do not quantify either effect.

The argument rests on two assumptions: AI-related spending keeps rising, presented as a forecast rather than a certainty, and productivity holds near 2%. They also caution that "AI investment isn't all good news."