As real yields soar into positive territory for the first time in two years, a hawkish turn by the Federal Reserve is undermining a crucial underpinning for US stocks.
Since March 2020, when the Federal Reserve reduced interest rates to near zero, yields on 10-year Treasury Inflation-Protected Securities (TIPS) – sometimes known as real yields since they deduct predicted inflation from the nominal yield on Treasury securities – have been in negative territory. On Tuesday, real yields rose over zero, signaling a shift in the market.
Negative real yields indicated that by buying a 10-year Treasury note adjusted for inflation, an investor would have lost money on an annualized basis.
Expectations of tighter monetary policy, on the other hand, are pushing yields higher, reducing the appeal of stocks compared to Treasuries, which are seen as far less risky because they are backed by the US government.
Expectations of tighter monetary policy, on the other hand, are pushing yields higher, reducing the appeal of stocks compared to Treasuries, which are seen as far less risky because they are backed by the US government.
“Real 10-year rates are a risk-free alternative to buying equities,” said Barry Bannister, Stifel’s chief equity strategist. “Equities become less enticing at the margin as real yield rises.”
The equity risk premium, which reflects how much investors anticipate being compensated for owning stocks rather than government bonds, is one significant element influenced by yields.
The metric is now at its lowest level since 2010, according to Trust Advisory Services, which released a note last week.
Higher yields, in particular, dull the attraction of technology and other high-growth industries, because their cash flows are frequently more weighted in the future and decreased when discounted at higher rates.