Real Yields Wade Toward Positive Territory, Denting Stocks

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The rise of inflation-adjusted bond yields has hit some of Wall Street’s more speculative bets

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Traders closely track TIPS yields because they offer a measure of financial conditions, showing whether borrowing costs are rising or falling for businesses and consumers when accounting for the effects of inflation expectations.

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Holders of TIPS are compensated as the consumer-price index rises, ending up with the same return as holders of ordinary Treasurys if annual inflation matches the difference between the two yields.

While TIPS yield rise signals improving returns for bonds and a return to more normal growth and inflation as the Federal Reserve starts raising interest rates, it has hurt many highfliers of the pandemic era.

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Often known as real yields, the yields on TIPS fell deeply negative at the start of the pandemic, meaning investors were guaranteed to lose money on an inflation-adjusted basis if they held the bonds to maturity. That helped power a surge in stocks by pushing investors toward riskier assets for better returns.

Now analysts expect that time to end, with central banks pulling back from their efforts to stimulate economic growth by holding rates ultralow and buying bonds. Many now expect the Fed to fight inflation with a series of rapid rate increases, including a half-percentage point move next month.

The rise in real yields is increasing the appeal of relatively safe investments, like government debt, while hurting the value of startups and companies with profits expected years in the future. The S&P 500 is on pace for its worst April performance since 1970, when it fell 9.1%, according to Dow Jones Market Data.

“We witnessed real rates explode higher, almost touching positive territory in the 10-year space, leaving equities extremely vulnerable,” said Brian Bost, co-head of equity derivatives at Barclays,

“‘There is no alternative’ is no longer a justification to hide out in equities.”

Bonds have slumped this year, in a move that was faster than investors expected. The yield on the benchmark 10-year Treasury is approaching 3% for the first time since 2018. Interest-rate derivatives show that investors expect the Fed to increase its benchmark rate from its current level between 0.25% and 0.5% to just above 3% next year.

“We went from not hiking until 2023 to the Fed hiking as much as 300 basis points in 2022. It has really been a cycle on steroids,” said Michael de Pass, global head of US Treasury trading at Citadel Securities.

That rapid shift in expectations has dented shares of low-profit tech companies and speculative wagers including Cathie Wood’s flagship ARK Innovation exchange-traded fund. The ETF targets companies it believes offer the greatest potential for innovation such as Zoom Video Communications Inc.,

and Coinbase Global Inc,

It gained popularity in 2020 when the Fed cut rates and investors chased higher returns in riskier places. Known by its ticker ARKK, the fund has plunged 20% since the beginning of April, bringing its year-to-date decline to 44%, as of Monday.

Rising rates increase corporate borrowing costs and offer investors an alternative means of earning decent returns, which can hurt stocks generally. But the effect tends to be larger on so-called growth stocks, because investors deem uncertain future profits less valuable when they can get more guaranteed income from Treasurys.

“For the first time in a while fixed income probably looks attractive relative to riskier assets like the stock market,” said Lisa Hornby, head of US multi sector fixed income at Schroders,

Ms. Hornby said rates could still move higher depending on coming inflation data. “I think we have priced in 80 percent of the move. Does that mean we are at peak yields? Probably not, but we have done a lot of the work.”

Wall Street strategists note that real yields remain low by conventional standards and have room to rise as the Fed lifts rates and inflation moderates. Many remain confident that a steady climb can avoid significantly disrupting companies or share prices.

“They are still extremely low from a historical perspective, which suggests the Fed may have more work to do in tightening financial conditions before higher real rates start to have a material impact on business activity,” said Gennadiy Goldberg, senior US rates strategist at TD Securities.

—Sam Goldfarb contributed to this article.

Write to Julia-Ambra Verlaine at [email protected]


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