The real yield of US Treasuries has also begun to rise, and risk assets are in jeopardy?

Since entering 2022, the yields of US Treasury bonds of all maturities have continued to rise in anticipation of interest rate hikes by the Federal Reserve, accelerated debt reduction (taper) and possible balance sheet reduction. As the anchor of global asset pricing, the us Treasury yield is high, which worries many market participants.

But now, there is another situation that worries them even more: real yields on U.S. Treasuries are also starting to rise, and real yields are rising faster than nominal yields. Many market participants warn that the rise in the real yield of US Treasuries will put more pressure on risk assets.

Real yields on U.S. Treasuries rose

Since the end of December last year, the yield on the inflation-linked 10-year Treasury note has risen 0.24 percentage points to -0.86 percent, the highest level since June last year. At the same time, the increase in the real yield of us Treasuries exceeded the increase in nominal yields of US Treasuries. The gap between the two, the break-even rate, which investors closely monitor as a measure of inflation expectations, fell by 2.58 percentage points from the previous 2.60 percent.

Previously, investors injected a record $70 billion into funds holding inflation-preserving Treasuries (TIPS) in 2021, hurting from soaring inflation, sending real yields on U.S. Treasuries to historic lows.

The U.S. CPI for December, announced overnight, rose 7 percent year-over-year, another more than 40-year high. Some analysts point out that the recent rise in real yields on U.S. Treasuries suggests that while U.S. inflation continues to rise, investors' fears of high inflation over the next decade have eased recently, or at least there has been a growing confidence in the Fed's ability to rein in price increases. Other analysts attribute the rise in real Yields on U.S. Treasuries to more limited supply: the Fed buys $6.5 billion a month in TIPS through quantitative easing programs, limiting the share available to ordinary investors, and the Fed's share of unmature TIPS has surged to 22 percent from 9 percent in early 2020.

Sam Lynton Brown, head of developed markets strategy at The Bank of France and Pakistan, said that as the Fed continues to implement taper and ends this shrinkage process in the coming months, the price of TIPS may fall, further exacerbating the rise in real yields.

Risk assets are at stake

For the rise in the actual yield of US bonds since this year, many analysts have warned with concern, which will lead to pressure on various risk assets from US stocks to bitcoin, ending the "recovery of everything" market after the epidemic.

Seema Shah, chief strategist at Principal Global Investors, said higher real yields on nearly risk-free U.S. Treasuries would make other assets relatively less attractive. Therefore, "the real yield of US Treasuries is the fundamental factor affecting the market, and the rise in real yields will make risk assets face a real test." He said.

Antoine Bouvet, interest rate strategist at ABN AMRO Bank (ING), also said: "When real yields rise, the cost of financing for the entire economy will rise with it." Unless there is more optimism about growth, this (rising real yields) will disrupt risk assets. ”

In fact, this is already happening. The technology-based Nasdaq Composite fell more than 3 percent in its first trading session of the year, making its worst start by a cumulative 4.5 percent decline in its first week; a basket of unprofitable tech companies tracked by Goldman Sachs fell even more, falling about 7 percent so far this year; Bitcoin also plunged 8 percent in its first week, with cryptocurrency-related stocks falling even more. According to arcane Research, a crypto data analytics firm, Bitcoin is currently down 38 percent from its all-time high last November, while the stock capitalization weighted index of the 15 largest bitcoin mining companies is down nearly 50 percent.

Of course, Germany's Berenberg Bank said through research that there have been many times in history when real yields on U.S. stocks and U.S. Treasuries have risen at the same time, most recently between March 2020 and February 2021. U.S. Treasury yields rose 1.5 percentage points during the period, and U.S. stocks continued to rebound from the plunge at the beginning of the pandemic in the same period, with global equity returns reaching 50% during the period. However, Berenberg pointed out that the current higher prices of technology stocks, which are more sensitive to interest rates than ever before, may make this situation where US stocks and real yields rise in tandem.

Analysts also said higher real yields on U.S. Treasuries could also lead to higher borrowing costs for businesses. "Real yields represent the true level of financing costs, not the level hidden behind inflation. In the event of an increase in real yields, we will be able to learn about the true health of a company's balance sheet. Shaha said.

Jim Reid, a senior analyst at Deutsche Bank, said that in recent years, the spread of corporate bonds (the additional yield that investors provide on corporate bonds relative to U.S. Treasuries) has become increasingly correlated with real yields. As a result, spreads will also rise as real yields climb. He added that highly indebted firms are more sensitive to changes in real yields because real yields test the sustainability of corporate debt more than nominal yields.