The real yield on 10-year TIPS notched up 2 basis points in April, reentering positive territory for the first time since the pandemic started. That move signals a return to normalcy amid stimulus withdrawal from central banks around the world, reports an article in Bloomberg. Real rates are a vital measure for corporations of their true interest costs and traders are increasing their bets on the Fed’s tightening policies as they rise.
Positive real yields will impact global markets in different ways, the article details. The sector under the most pressure? Tech, with its high-priced stocks. Earlier this year, real yields helped push the Nasdaq 100 into a bear market. In Asia, Taiwanese and Korean stocks look especially vulnerable, but Southeast Asian equities that have less exposure to tech or growth might do better, says the Asia-Pacific equity strategist at Nomura Holdings Inc., Chetan Seth.
In Treasuries, sentiment could turn more favorable as more investors start to predict acceptable returns. Negative real yields locked Treasuries investors into negative returns after inflation, but under a positive real yield, the situation would be reversed. But Kellie Wood at Schroders Plc warned, “I really do think the Fed will gaslight investors and get real yields up to tame inflation.”
Meanwhile, positive real yields could be an obstacle for corporate bonds; a Bloomberg measurement of dollar investment-grade corporate bonds has fallen more than 12% in 2022, a scenario that could worsen if yields continue to rise and spreads widen. But the surging real yields are a boon for the global reserve currency, which has gone up as U.S. rates are expected to rise, the article continues. Currently, the dollar is strong against most of its Group-of-10 cohorts, and higher positive yields could strengthen it even further as the U.S. economy recovers. “Long dollar remains a good trade,” says Hong Kong-based strategist Alvin Tan.
But in contrast, many emerging markets are finding their currencies to be casualties of positive real yields, falling 1% as of mid-April, according to an MSCI gauge of emerging-market currencies. Its equity index counterpart has plunged 11% so far in 2022, worse than the S&P 500. Argentinian and Chilean pesos, the Hungarian forint, and the Taiwanese dollar and Malaysian ringgit are the lowest performers around the world. But Leonard Kwan of T. Rowe Price Hong Kong says, “Rate hikes in Asia are still in the early stages so the differential in real yields favors the U.S. dollar at this point in time.”