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Tech route supported by the transformation of the bond market

Investors are largely eerie with rising bond yields Discard last week’s inventoryIntensifies the initial loss, which has been surprised by many with speed and seriousness. Again, tech stocks were at the forefront.Sales also expanded to include sectors such as banking and energy, and the S & P 500 Covid-19 Pandemic..

According to analysts, many of these moves are underpinned by rising yields on inflation-protected government bonds, known as TIPS, as well as regular US Treasury yields.

Investors pay close attention to TIPS yields to provide important financial position indicators of whether corporate and consumer borrowing costs are rising or falling when the effects of expected inflation are removed. I’m paying.

Often referred to as the actual yield, the TIPS yield has been very negative since the early days of the Covid-19 pandemic. Helps promote oversized stock market profits By pushing investors into higher-risk assets in search of better returns. Even today, they remain less than zero. This means that holders are guaranteed to lose money on an inflation-adjusted basis if they hold the bond to maturity.

Still, this year it was even higher than regular government bond yields. This shows rising corporate borrowing costs, higher bond returns, and a return to more normal growth and inflation as the Fed begins to tighten monetary policy. Of these, it’s generally bad news for high flyers in pandemic rally.

Investors will gain new insights into the Fed’s thinking this week, when the central bank will hold its first policy meeting this year.They will also pay close attention to corporate profits from things like

General Electric Co., Ltd...

,

Johnson & Johnson

When

Microsoft Corp..

Looking for positive news, reversing the weekly decline in all three major stock indices.

Donald Ellenberger, Senior Fixed Income Portfolio Manager at Federated Hermes, is one of the heads of the surge in real yields. Since the early days of the Covid-19 pandemic, he has been a major buyer of TIPS, steadily increasing from 4% of the multi-sector fixed income portfolio in March 2020 to 7% by November of that year.

Elenberger’s concern at the time was that historic fiscal and monetary stimulus measures would lead to a surge in inflation. This shows the foresight of the recovery of TIPS and the surge in the consumer price index in 2021. 7% increase in December From a year ago.

But by the end of last year, the Fed Shift courseWe promise to accelerate the end of the bond purchase program and start raising interest rates in March. In response, Elenberger and his team have reduced their TIPS holdings from 7% to 1%.

“If the Fed no longer tolerates out-of-trend inflation in the hope of creating full employment in all demographic segments of the population, the rise in TIPS compared to nominal government bonds is far less attractive,” he said. Said.

Last week alone, the technology-intensive Nasdaq Composite fell 7.6% and the S & P 500 fell 5.7%. This is the largest weekly decline since March 2020, with Bitcoin falling 15%. In the bond market, benchmark US Treasury yields settled at 1.747% on Friday, down from 1.771% a week ago, as nervous investors fled stocks in search of safer assets. While enduring cross currents, 10-year TIPS yields continued to rise, rising from minus 0.708% a week ago to minus 0.603%.

A rise in Treasury yields is not necessarily bad for stocks. In some cases, investors anticipate more economic growth and inflation, which could lead to higher interest rates in the future, so they sell bonds and boost yields. In that case, the real yield may increase. However, nominal yields tend to rise further, and the negative effects of higher borrowing costs can be overwhelmed by improved economic outlook and stocks can rise, as has happened after the last two presidential elections.

This year’s sells fall into another category, not very favorable to equities, and investors are aggressively preparing for monetary tightening policies and withdrawing inflation bets.

On Wall Street, TIPS holders are compensated for rising consumer price indexes, and if annual inflation occurs, they will return the same as regular Treasury holders, so they are protected from inflation with regular Treasury. The Treasury yield gap is known as the breakeven inflation rate. Matches the difference between the two yields.

In a 2020 report, BNP Paribas analysts found that a 10-year break-even increase of 0.3 percentage points correlates with an S & P 500 increase of 6.6 percent and a Nasdaq increase of 5.2 percent. Did. At the same time, the report found that a 0.15 percentage point increase in real yield over a five-year period correlates with a 1.4% decrease in S & P 500 and a 4.2% decrease in Nasdaq.

A major concern for investors is where yields are heading from here, and there is growing concern that more profits can and are likely to fuel further volatility in other assets. In particular, the Treasury inflation protection securities yield for Friday’s five-year period was still minus 1.204%, well below the real short-term interest rate of about 0.5% estimated by most Fed officials. Run for a long time.

Many investors are convinced that both bonds and equities should be stable. Economic strength A record of the Fed’s recent attention in normalizing monetary policy.

Julian Timmer, Global Macro Director of Fidelity Investments, said: “As long as I think it’s been generally orderly so far, I think it’s okay.”

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Still, there are some notable exceptions. Value investor Jeremy Grantham, co-founder of Boston’s money managers Grantham, Mayo and Van Ottelru & Company, predicted a market crash in 2000 and 2008. Last year, stocks said they had fallen into a big bubble It is based on the belief among investors that interest rates will remain near zero forever. Last week he upgraded it to a “super bubble” that could end at any time.

In a memo posted on GMO’s website, Grantham generally makes sense to avoid US stocks and look for cheaper alternatives in emerging markets and some developed countries such as Japan. I said there is.

“Personally, I like cash for flexibility, resources for inflation protection, and a little gold and silver,” he writes.

Write on Sam Gold Fab sam.goldfarb@wsj.com

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Tech route supported by the transformation of the bond market

Source link Tech route supported by the transformation of the bond market

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