Fed tightening sends US ‘real yields’ to brink of positive territory

US inflation-adjusted bond yields are on the verge of becoming positive for the first time since March 2020, with a jump that increases further pressure on more risky corners of the financial markets.

The Ministry of Finance’s real yields for 10 years have jumped more than one percentage point since the beginning of March, reaching a peak of minus 0.04% on Tuesday, as bond payments approach the medium-term inflation expectations.

Jump in Real returns Activated by the Federal Reserve’s proposal to slow down intensive price growth by aggressively tightening monetary policy. The move has already eroded one of the pillars that underpinned a strong rise in stocks and corporate bonds more risky than the depths of the Corona crisis two years ago.

“The Federal Reserve is going to drain liquidity,” said David Lefkowitz, the U.S. stockbroker at UBS’s chief investment firm. [may] Deal with some. . . A headwind when the Fed goes the other way and retreats. “

The fall in real yields on U.S. government bonds at particularly low risk, deep into negative territory in 2020, has opened up a race of investors to hunt for assets that can deliver higher returns when inflationary effects are taken into account. From the low of March 2020 to the end of 2021 as a result, when the risky corporate debt also rose sharply.

This year’s jump in real returns has led investors to re-evaluate the value of owning businesses that may not yield large profits for many years. Some private start-ups like Instacart have agreed to this Cut their valuationsWhile shares of tech companies are losing more than 30 percent this year, according to Goldman Sachs.

Even the S&P 500 of America, the home of listed companies in the country, has fallen more than 7% so far in 2022, with rising real yields combined with uncertainty about the war in Ukraine and fierce inflation. Scary investors. In the corporate debt market, the Ice Data Services index, which tracks US bond yields, fell 6.3% over the same period.

This year’s jump in real yields reflects a jump in nominal, or non-inflation-adjusted credit costs, spurred by the Fed, which raises interest rates and moves rapidly to a $ 9 billion balance sheet as policymakers try to reduce the decline Pressures are exceeding consumer prices.

Treasury yields rose more sharply than inflation expectations, a deviation that indicates investors have confidence in the Fed’s ability to reduce troubling inflation levels in the coming years. The 10-year balance rate, a market-based index of investors’ inflation forecasts over the next 10 years, has held in recent weeks in the range of about 2.75 to 3 percent, much lower than the March 2022 inflation rate of 8.5 percent.

“There is a reasonable degree of belief in the Fed’s ability and willingness to fight inflation,” said Ian Lingen, a strategist at BMO Capital Markets. “What is at stake is not whether the Fed’s response is properly calibrated to inflation at the moment, but a belief on the part of market participants that the Fed will adjust policy as needed.”

Performance line chart (%) showing fast-growing technology groups' stocks have declined over the past 6 months

The rise in real yields also shows how well the Fed has managed to tighten financial conditions over time, a turnaround that Alal Brainard, a governor who admitted to being the next deputy chairman, acknowledged last week.

“The media on our policy plans has already hardened the broader financial terms over the last four to five months, much more than you can discern just by looking at interest rates alone,” she said at an event hosted by the Wall Street Journal.

Corporate lending costs have risen higher, as have consumer mortgage rates, which reached 5% for the first time since 2011 last week, according to Freddie Mac.

Despite the rise, financial conditions are “still pretty loose,” said John Madgeire, portfolio manager at Vanguard. “It may mean the Fed will have to do more, but it’s too early to know.”

Economists disagree on how much the real yields may rise given the already rapid move. But some warn that they may jump again as the Fed tries to curb inflation.

“The $ 64,000 question is how high the real yields are,” Lefkowitz said.

Fed tightening sends US ‘real yields’ to brink of positive territory Source link Fed tightening sends US ‘real yields’ to brink of positive territory

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