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Analysts and investors say US bond yields adjusted for inflation have hit their highest level in 14 years, hitting technology stocks hard.
The so-called “real yield”. Treasury bonds The gains have been made over the past two weeks as investors bet that the Federal Reserve can keep inflation under control by keeping interest rates high while avoiding sending the economy into recession.
The yield on US 10-year inflation-linked government bonds, known as TIPS, rose to 1.998 percent on Thursday, their highest level since July 2009, according to Tradeweb data. It has increased by 0.4 percentage points in August alone.
At the same time, the 30-year inflation-linked bond rose to its highest level since February 2011, while the five-year TIPS yield reached a 15-year high.
The real yield is the inflation-adjusted return on Treasury bonds, and is closely watched by the Fed and investors as a basic measure of how much it costs companies to borrow money, absent the effects of price increases.
technology Stocks that promise high future growth when interest rates are low are usually far more attractive to investors. When investors are able to get higher yields in less risky bonds or money market funds, they can quickly lose their allure. The 4.3 percent return on the 10-year Treasury note may deter an investor from buying the riskier asset.
Higher yields can also impact stocks of technology companies that rely on debt to finance their growth.
The rise in real yields coincided with a 6.1 percent decline for the Nasdaq Composite this month, as analysts and traders increasingly believe real rates are affecting the sector.
“Higher real rates have hindered the equity rally this year — they have put pressure on equities,” said Gennady Goldberg, head of US rate strategy at TD Securities.
“When you see a real increase in the cost of borrowing, that’s when you see companies start making tough choices,” Goldberg said.
Along with this decline in equities has come a broader tightening of financial conditions – a measure of the cost and ease with which companies can raise cash.
Financial conditions in the US have loosened since peaking in October, even as the Fed raised interest rates to the highest level in 22 years. But the Goldman Sachs index of financial conditions rose in August to its highest level since May.
“Real rates are rising and this is certainly hurting riskier assets. It’s tightening financial conditions,” said Andrew Brenner, head of international fixed income at NatAlliance Securities.
Treasury yields could rise further, and not just because the prospect of a soft landing is rising.
The US announced earlier this month that it would increase the size of Treasury bond auctions to bridge the widening gap between tax revenue and government spending. The prospect of more Treasury bonds in the market has helped drive down prices and raise yields. That change in supply has already pushed up the yield on Treasuries.
For the Fed, real yields will provide insight into the progress of its monetary tightening campaign, which began last spring.
Stuart Kaiser, head of equity trading strategy at Citi, said real yields weren’t much of a concern when inflation peaked, but now that price pressures have eased, investors and the Fed are more focused on real yields. are doing.
“Inflation is starting to stabilize, so people are more focused on how much the Fed actually tightened,” Kaiser said. “If nominal yields remain at this level even with inflation falling, you will have more restrictive real yields.”
A significant increase in real yields could bolster the case that the Fed raises interest rates substantially.
Futures markets are pricing in a roughly 50/50 chance that the central bank will raise interest rates by an additional quarter-point by November. If economic data continues to show a slowdown in inflation – and that could change if financial conditions remain tight.
“The Fed is increasingly discussing real rates. To me, this is a sign that the Fed believes that monetary policy is gaining momentum and they need to think about the next steps,” said Sophia Drosos, economist at Point72 Asset Management.
“The Fed is taking the view that the current level of real rates may not be appropriate given that the economy will decline over the next year.”
Additional reporting by Nicholas Magow in New York