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Analysts and investors said U.S. bond yields adjusted for inflation had soared to their highest level in 14 years, dealing a heavy blow to technology stocks.
So-called “real yields” on U.S. Treasuries have surged over the past two weeks as investors bet the Federal Reserve can keep interest rates high to keep inflation in check while avoiding a recession.
Yields on 10-year U.S. inflation-linked government bonds, or Tips, hit 1.998% on Thursday, the highest level since July 2009, according to Tradeweb. It rose 0.4 percentage points in August alone.
Meanwhile, the 30-year inflation-linked bond reached its highest level since February 2011, while the five-year Tips yield hit a 15-year high.
Real yields, the inflation-adjusted rate of return on Treasuries without taking into account the impact of higher prices, are closely watched by the Fed and investors as a fundamental measure of corporate borrowing costs.
Tech stocks that promise high future growth are often more attractive to investors when interest rates are low. Low-risk bonds or money market funds quickly lose their appeal when investors can earn higher yields. The 4.3% return on the 10-year Treasury note may deter investors from buying much riskier assets.
Higher yields could also weigh on shares of technology companies that rely on debt to fund their growth.
The surge in real yields coincides with a 6.1% drop in the Nasdaq Composite for the month, as analysts and traders see real rates taking a toll on the sector.
“Rising real interest rates have stalled the stock market rally this year, putting pressure on stocks,” said Gennadiy Goldberg, head of U.S. rates strategy at TD Securities.
“When you see borrowing costs really increase, you’re going to see companies start to make hard choices,” Goldberg said.
The decline in stocks has also been accompanied by a tightening in broader financial conditions – a measure of the cost and ease of companies raising cash.
Financial conditions in the US have eased since peaking in October, even as the Federal Reserve has raised interest rates to the highest level in 22 years. But Goldman’s financial conditions index rose in August to its highest level since May.
“Real interest rates are rising and that’s definitely hurting risk assets. Financial conditions are tightening,” said Andrew Brenner, head of international fixed income at NatAlliance Securities. ”
U.S. Treasury yields are likely to rise further, and not just because the odds of a soft landing are increasing.
The U.S. announced earlier this month that it would increase the size of its Treasury auctions in a bid to narrow the growing gap between tax revenues and government spending. The prospect of more Treasuries in the market helped push prices lower and yields higher. The shift in supply has already sent U.S. Treasury yields higher.
For the Fed, real yields will provide an indication of the progress of its monetary tightening campaign that it began last spring.
Stewart Keizer, head of equity trading strategy at Citigroup, said real yields didn’t get much attention when inflation was rampant, but now that price pressures have subsided, investors and the Fed are starting to focus more on real yields.
“Inflation is starting to stabilize, so people are paying more attention to how much the Fed has really tightened monetary policy,” Keizer said. “If nominal yields are going to stay at this level even as inflation falls, then real yields will be more affected.” limit.”
A sharp rise in real yields could provide further evidence that the Fed has sufficiently raised rates.
Futures markets are pricing in about a 50/50 chance that the central bank will raise rates by 25 basis points by November. That could change if economic data continue to point to moderating inflation and financial conditions remain tight.
“The Fed is talking more and more about real interest rates. To me, it’s a sign that the Fed thinks monetary policy is gaining momentum and they need to think about the next phase,” said Sophia Drossos, an economist at Point72 Asset Management. )express.
“The Fed appears to be considering that with the economy decelerating next year, the current level of real interest rates may not be appropriate.”
Additional reporting by Nicholas Megaw in New York