The pandemic fueled a distorted financial market, and now it seems their impact is truly over. The new normal has hit everyone now with the worst sell-off in all categories of assets rarely seen in decades.
The treasury yield, showing negative returns during lockdowns, is now breaking out again. The five-year and 10-year bonds are back with multiyear highs.
The real short-term rates also changed drastically this week to a high since March 2020, indicating that the free money era is over.
Rate Sensitive Tech Stocks to Hurt
For money Managers, this is bad news. It has become difficult to justify tech stocks to long-term bond investment allocation considering these products are rate sensitive. The rising bond yields are seen as the real cost of borrowings with the soaring mortgage rates. The higher operational cost of doing business has made corporate America adjust accordingly.
Things can get worse with a new thought process among traders on Wall Street. They feel the Federal Reserve’s hawkish approach is to impose tighter money conditions and tame inflation via lower equity prices and higher bond yields.
Goldman Sech’s projection of real yields in the next ten years suggests a risk for investors in every market category. The yield will move closer to a restricted economic activity level.
The fresh yield surge has resulted from Fed chief Powell’s speech at the Jackson Hole symposium, where he predicted further hikes in borrowing costs to restrict growth in a range and tame inflation. The US’s 5- and 10-year real rates advanced 38 and 30 basis points, respectively, whereas, in contrast, Nasdaq 100 plunged 8%.
Nomura Holdings strategist for cross-assets, Charlie McElligott, said that any push to multiyear high bond yields would show a corresponding stock decline.
Tech stocks are likely to suffer from inflation-adjusted rising yields, and their long-term earnings projections will now be discounted at higher rates. Simultaneously, the assets such as cryptocurrencies and gold that are bereft of income streams will appear less appealing as an asset class. Holding them will have lower opportunity costs than treasury bonds that give real-time returns.
These projections pointed to the post-financial crisis when central banks had propped up the economy with the lowest rates and money managers went berserk, investing in risker assets to make high gains.
President of Minneapolis Fed, Neel Kashkari, in an interview with the Odd Lots podcast of Bloomberg after the Jackson Hole event, said that real rates are the actual drivers of economic growth. He also did not rule out a scenario where the inflation rate does not reach its target and borrowing costs continue to increase.
A Goldman Sachs analysis points to only a 30 basis point gap from the 1 % tipping point for 10-year inflation-protected securities. This is where the economy will start seriously hurting.
