(Bloomberg) — Surging U.S. real yields suggest bond traders believe the Federal Reserve can get a grip on inflation, but are likely to put further pressure on stocks and precious metals.
The benchmark inflation-adjusted Treasury yield has jumped more than 80 basis points in a month and touched a two-year high of minus 0.19% on Wednesday, as the Federal Reserve made it clear it will aggressively tighten policy. The move came even as gauges of expected inflation shrank, showing investors are becoming convinced the central bank will do whatever it takes to rein in rising prices.
But it’s also a clear danger sign for riskier assets like high-priced tech shares, threatening valuations and stocks’ relative attraction to bonds. Virtual currencies and precious metals are also vulnerable, because their lack of an income stream becomes a disadvantage should real yields climb substantially above zero.
“If real yields are moving higher it should mean a tightening for financial conditions, and that’s not a positive for risk assets,” said Mitul Kotecha, chief emerging market and Europe strategist at TD Securities in Singapore. “Rising inflation has caught markets and policy makers out, now we’re playing catch up.”
A slump in technology shares has led broader markets lower this week as investors reacted to hawkish commentary from Fed officials and real yields pushed higher. Fed Governor Lael Brainard on Tuesday called the task of reducing inflation pressures “paramount,” and confirmed plans for a series of rate hikes and a rapid reduction in the central bank’s bond holdings.
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“Looking back to the 1970s, it wasn’t until real yields rose that inflation actually started to moderate,” said Kellie Wood, Deputy Head of Fixed Income, Australia at Schroders Plc in Sydney. “The Fed has to get nominal yields above the rate of inflation to slow the economy and tame inflation. We believe the Fed is well behind the curve.”
The tech-heavy Nasdaq 100 Index has fallen 2.4% this week, thanks in part to pressure from the bond market. Bitcoin has slumped about 6% and gold futures are little changed.
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