Real Returns vs. Nominal Returns: Protecting Purchasing Power

Growing and protecting your wealth means focusing not just on how much you earn, but on how much value your money retains over time. A 10% return may seem attractive, but if inflation is 7%, your real return - your actual increase in purchasing power - is only 3%.

In a high-inflation environment, even strong nominal returns can lose their impact. Real return provides a clearer picture of whether your money is growing in meaningful terms, making it a vital concept for long-term investors.

The Impact of Inflation on Bonds

Inflation plays a key role in bond performance and ultimate returns, particularly with fixed coupon government bonds. These bonds offer an advertised coupon split into two payments per year and are quoted at the current Yield to Maturity. Inflation however gradually erodes the purchasing power of that income. Real return reflects the actual growth of your investment after adjusting for inflation.

Accessing Government Bonds via EasyEquities

Through EasyEquities, investors can access a range of South African government bonds with maturities of 1, 5, 10, 15, and 23 years. These are among the most liquid bonds on the market, making them a practical option for individual investors.

Current yields are:

• 1-year: 8.05%
• 5-year: 8.91%
• 10-year: 10.65%
• 15-year: 11.72%
• 23-year: 11.92%

This range gives investors flexibility to manage both interest rate exposure and inflation expectations within their portfolios.

Estimating Your Real Return

To estimate your real return, subtract your expected inflation rate from the bond’s nominal yield. For example, if inflation averages 3% and the 10-year bond yields 10.5%, your real return is 7.5%. If inflation is 2.5% and the 23-year bond yields 11.81%, the real return would be roughly 9.31%.

Each time you invest, you are indirectly facing the impact of inflation when considering your real return. If inflation stays low, your purchasing power grows. If it rises unexpectedly, inflation-linked bonds offer a hedge by adjusting to price changes and locking in a real yield. One convenient way to access these is through the FNB Government Inflation Linked Bond ETF, which holds a diversified portfolio of inflation-linked government bonds and pays out quarterly, without a fixed investment term.

Nilan Morar, VP of Trading and Head of Product (EasyBonds), explains: “The 10-year bond yield is a key benchmark rate in finance. It is often referred to as the acceptable theoretically "Risk-Free" rate. This rate is commonly referenced for investment comparisons as well as asset pricing models.”

South African government bonds are available on EasyEquities through several account types, including the standard ZAR account, Tax-Free Savings Account (TFSA), and Retirement Annuity (RA). While all investors can access these bonds through a ZAR account, using a TFSA or RA adds tax advantages, like tax-free interest in a TFSA. To learn more about investing in government bonds and how to qualify for payouts, click here or below.

Government bonds offer a reliable way to earn fixed income by lending money to the government in exchange for regular interest payments. 

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