What I don’t understand is why bond investors still continue to accept such meager real long-term yields.
I don’t think they are, which is why the curve is so flat. Let’s not forget that the bond market just had its worst quarterly performance in 30 years. That is not an indication of “acceptance.”
That being stated, the futures market has priced in a return to relatively normal inflation in the next few years.
https://www.forbes.com/sites/garthfriesen/2022/04/20/forward…
Most financial markets have actively traded futures markets, which, when viewed together, describe a macro landscape that can be very different from the one today. The good news is that these markets predict that inflation is near its peak.
…
The one-year inflation rate beginning in one year, known as the 1y1y inflation rate, is 3.5%. While still higher than the average rate over the last decade, it is significantly lower than the current annualized rate of 8.5%. The forward inflation market tells us that investors think the CPI is near a peak and will slow dramatically over the next couple of years.
Of course short term Treasury yields are way up. The 2 yr note yield has more than doubled this year from around 0.75% to 2.7% at the end of April, but it also has slowly started to come down and now sits around 2.5%. The bond market has gotten well out and ahead of the Fed so many might be interested in capturing a yield not seen for over of a decade (absent a very brief period in 2019) with the expectation that if there is a recession, the fed will again cut rates, and yields will drop.