Real interest rates are mostly isolated from inflation because realized inflation is paid to the holders of these bonds. Real interest rates are driven by two major factors. 1. Growth 2 risk premium.
Growth is a factor because most assets have a spread to real rates. Corporates and equities are all spread to real rates. Those issuers do better when growth is higher. Thus when growth is higher money leaves real interest rate products to risk assets driving real rates higher
What drives growth over time? Growth means stuff. More growth means more production. More production can happen in two ways. More people working or each person working more efficiently. At full employment more people working is driven by demographics.
Demographics can be local. Shifts in birth rates, shifts in age one is willing to work, distribution of age in the local population, and immigration policy. Demographics is also global which is all the same factors as local except until aliens arrive from outer space immigration
Productivity is also local and global. Locally if you build cities and move people from dirt farms to factories you get a ton of productivity. Particularly if you have a ton of people. China 👀
Developed economies need technological changes to spur productivity growth as most workers are already in jobs where they are using their skills most efficiently.
Population and productivity drive growth which drives one of the two drivers of real Interest rates
The other factor is risk premium. That is driven by two things itself. 1. Money and credit available to buy assets and the availability of assets to buy. 2. The expectations of future risk of assets. I have written a thread on risk premiums which goes into more detail
So what? Well, today real yields are very low and have been very low for a while. This is because changes in population and productivity are slowing and is likely to slow (grow at a lower rate) for decades to come and…
Risk premiums are low as central banks have bought assets competing with savers. While savers have been handed $7-10TN in government emergency stimulus and have been given normal budget deficit spending for two decades. There is a savings glut even without QE.
I see no reason to believe that taper will significantly change this dynamic of savings glut, falling population growth, and stable productivity.