This key interest rate in the United States is approaching a "historic breakthrough".

Currently, the attractiveness of US short-term government bonds with a yield approaching 5% has captured the attention of the entire market. However, another key interest rate in the US is on the eve of a "historic breakthrough".

The yield on US 30-year Treasury Inflation-Protected Securities (TIPS) is rapidly approaching the critical 2% level. If it surpasses this level, it will be the first time since 2011, and countless bond investors are eagerly awaiting this moment.

For some investors, the cumulative interest rate hikes by the Federal Reserve over the past 18 months, exceeding 5 percentage points, make a 2% "real yield" an attractive buying point. However, some believe that there is still uncertainty about whether US inflation has peaked, coupled with the increasing borrowing needs of the US government, which may further drive up long-term yields.

The last time the 30-year TIPS yield surpassed 2% was in 2011. Since then, with the Federal Reserve significantly lowering interest rates and the demand for inflation protection soaring, the 30-year TIPS yield fell to around -0.50% in 2020 and 2021.

Rob Waldner, Chief Fixed Income Strategist at Invesco, said:

"Our view is that both nominal and real bonds should be held.

Nominal growth is slowing below nominal interest rates. There is also a risk of rapid policy tightening, and the Federal Reserve may be making a mistake."

For long-term liability investors such as pension funds and insurance companies, the 2% yield on the 30-year TIPS may be irresistibly attractive. Michael Pond, Global Inflation-Linked Research Director at Barclays, said that over the past decade, these investors have shown little interest in the 30-year TIPS. However, at the 2% level, this investment group may return to the market.

Therefore, the issuance of the US 30-year TIPS scheduled for August 24th will be a "litmus test". The previous auction of inflation-protected bonds (10-year TIPS) held on July 20th saw strong market demand, with a bid yield of 1.495%, the highest since 2010.

The upward pressure on TIPS and long-term nominal US bond yields reflects the market's high degree of uncertainty about the inflation path. Although inflation indicators released this week and inflation expectations from surveys have declined, crude oil prices have reached their highest level this year, and healthcare insurance may also start pushing up inflation.

Michael Cudzil, Portfolio Manager at PIMCO, said:

"We may need higher real and nominal yields.

Our baseline forecast is that the economy will experience a significant slowdown, which will lead to a recession and ultimately lower interest rates. However, we may see more inflation premiums on the curve that we haven't seen in a long time."

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Meanwhile, market sentiment is taking a hit. In a report on Friday, Citibank strategist Edward Acton wrote:

The longer the 30-year TIPS yield remains above 1.86%, the more likely it is to move towards a new cyclical high, with a mid-term target possibly being the 2.28% high point in 2010."