Stock prices for shares with high valuations are being threatened by rising real yields. The Financial Times reports:
A jump in real yields — the return bond investors can expect once inflation is taken into account — has jolted markets in early 2022 and is behind a pullback in high-flying technology stocks, investors say.
The yield on 10-year inflation-linked US government bonds has surged 0.24 percentage points since the end of December to minus 0.86 per cent, as investors position for the end of the Federal Reserve’s bond-buying programme and bet on interest rate rises from the US central bank this year.
The move has come at a time when investors have become slightly less anxious about high inflation over the coming decade, or at least more confident that the Fed can keep a lid on price rises.
Real yields have risen more than yields on ordinary US Treasuries so far in 2022. That means the gap between the two — which is known as break-evens and is a closely followed gauge of investors’ inflation expectations — has fallen slightly, from 2.60 percentage points to 2.58 percentage points.
In the bond market turmoil, investors say it is the rise in real yields that is most concerning for riskier assets, feeding declines in everything from stocks to bitcoin in a reversal of the “everything rally” during the pandemic when a collapse in real yields was linked to gains for assets of all stripes.
“Real yields are what is truly impactful for markets, and seeing them rise will really test risk assets,” said Seema Shah, chief strategist at Principal Global Investors.
For investors, higher real yields on ultra low-risk government debt make other assets relatively less attractive. That logic is particularly painful for the highly valued corners of the equity market that have benefited most from very low interest rates.
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