The Fed last week added aggressive quantitative tightening proposals to its plan for a rapid increase in interest rates to cap surging inflation. That threatens to remove a key support for global risk assets, with high-priced technology shares feeling the brunt of the pressure as the rise in real yields threatens valuations. The benchmark inflation-adjusted yield climbed as much as eight basis points to minus 0.11% Monday, not far off a break into positive territory for the first time in two years.
“If today’s inflation and fiscal concerns fester, the great diversification benefit provided by Treasury bonds to equity investors the last 25 years by usually rallying when equities sharply sold-off could be lost,” wrote David Bianco, Chief Investment Officer, Americas, at DWS. “We think the next 5% price move for the S&P 500 is likely to be down given slowing earnings growth, elevated inflation and numerous Fed hikes likely pressuring the price/earnings ratio.”
Key for global markets this week is U.S. consumer price data, as the war in Ukraine, now into a seventh week, amplifies price pressures. Economists expect an 8.4% gain in March’s index from a year earlier, a fresh four-decade high. For now, strategists see the momentum for higher yields persisting.
“At this rate markets are aiming for another nice clean round number like 3%” on the 10-year Treasury yield, George Goncalves, head of U.S. macro strategy at MUFG Securities Americas, said in a note. “Given the nature of the multi-decade bond bull run, we have never had a full retracement of a prior high as yields had been consistently heading lower.”
--With assistance from Melissa Cheok, Cormac Mullen, Ishika Mookerjee, Nicholas Reynolds and Liz Capo McCormick.
This article was provided by Bloomberg News.