Fed tightening sends US ‘real yields’ to brink of positive territory

Fed tightening sends US ‘real yields’ to brink of positive territory

US inflation-adjusted bond yields are on the verge of turning positive for the first time since March 2020 in a surge that is heaping further pressure on riskier corners of financial markets.

So-called 10-year real Treasury yields have soared more than 1 percentage point since early March, hitting a high of minus 0.04 per cent on Tuesday, in a sign bond payouts are coming close to exceeding medium-term inflation expectations.

The jump in real yields has been triggered by the Federal Reserve’s bid to slow intense price growth by aggressively tightening monetary policy. The move is already eroding one of the pillars that has underpinned a powerful rally in stocks and riskier corporate bonds from the depths of the coronavirus crisis two years ago.

“The Federal Reserve is going to be draining liquidity,” said David Lefkowitz, the head of US equities in UBS’s chief investment office. “It is those more speculative parts of the market that benefit the most when the Fed is adding liquidity and they [may] face some . . . headwinds when the Fed is going the other way and pulling back.”

The plunge in real yields on ultra low risk US government bonds deep into negative territory in 2020 set off a race by