US Government Forced to Pay Positive Real Rates on Debt

Adam Jeffery | CNBC

Investors are ditching debt that protects them against inflation as fears the Federal Reserve will ease its bond-buying program mount, sending the real rates on 10-year Treasurys into positive territory for the first time since 2011.

For the last several years investors had been piling into Treasury inflation protected securities (Tips) on expectations the Fed's three rounds of quantitative easing would spark inflation.

But indications the Fed may trim quantitative easing and tame inflation have led to a quick sell-off, forcing the U.S. government to pay real rates (interest minus inflation) on 10-year debt for the first time in 18 months.

(Read More: Markets May Be Overpricing Risk of Fed Tapering)

Tips, or linker yields, rose to 0.07 percent on Wednesday from minus 0.75 as recently as April, when investors were willing to lock in a small negative return to reduce the risk that inflation would erode their purchasing power.

"What has happened here is that as the market is speculating over QE tapering, and the Fed buying less Treasurys," said Richard McGuire, senior fixed income analyst from Rabobank.

"The breakeven (the spread between nominal yields and Tips) will continue to narrow if the market continued to hold the view that the Fed will continue to be ahead of the curves and take liquidity out too quickly. The difficulty there is then we are back to this volatility on a case by case basis," he added.

The pull-back from Tips is also hitting emerging markets as investors are being attracted back to the U.S. by the real positive yields.

(Read More: Bond Sell-Off Heightens Risk of '1994 Moment')

Geoffrey Yu, forex strategist at UBS said the risk-reward ratio in emerging markets (EM) is disappearing as U.S. rates rise.

"You might as well pull out while you still can," he told CNBC.

He said investors were also referring to the history books, as periods of normalization in monetary policy have historically not been good for emerging markets."Emerging markets inflows, have been absolutely immune, it has been de-correlated with whatever has been going on in G10 right now. People are buying dollars versus EM full stop, they see this as a structural story, China's growth numbers are going to slow down," he said.

(Read More: Stock Markets Tumble as Investors Bail on Risk)

Even HSBC's forex strategist David Bloom, who had been a dollar bear has turned bullish on the greenback.

"The starting point for this EM story was the changing view of the U.S. bond market, meaning what we are witnessing is therefore a USD story and not a EUR one," he added.

—By CNBC's Jenny Cosgrave: Follow her on Twitter @jenny_cosgrave