Real Dividends Wade Towards Positive Territory, Denting Stocks

Interest rates on government bonds are catching up with expected inflation after years of lagging behind, a threat to the speculative stock market bets that spread in an era of bottom interest rates and economic stimulus.

Bond yields following inflation are pushing investors to look for an alternative; many found it in the stock market, triggering an increase in risky assets.

But now 10-year government bond yields are losing investors less and less money after adjusting for inflation. One meter, the yield on 10-year government bond-protected inflation-linked securities, or TIPS, closed on April 19 at 0%, according to Tradeweb.

It was the first time it was not negative since March 2020, when global central banks lowered interest rates to support economies plunged into shock by the coronavirus pandemic. (The yield has been driven lower in recent days and on Tuesday was around minus 0.11%).

Traders closely follow the TIPS dividend because they offer a measure of financial conditions that shows whether borrowing costs rise or fall for businesses and consumers when they take into account the effects of inflation expectations.


Where will the effect of the increase in inflation-adjusted bond yields be felt most?

Holders of TIPS are compensated as the consumer price index rises and end up with the same return as holders of ordinary government bonds if the annual inflation matches the difference between the two returns.

While the TIPS rate hike signals improved bond yields and a return to more normal growth and inflation as the Federal Reserve begins to raise interest rates, it has hurt many highflyers in the pandemic era.

Often known as real interest rates, interest rates on TIPS fell deeply negative at the beginning of the pandemic, meaning that investors were guaranteed to lose money on an inflation-adjusted basis if they held the bonds to maturity. It helped drive a rise in equities by pushing investors towards more risky assets for better returns.

Now analysts expect the time to end when central banks withdraw from their efforts to stimulate economic growth by keeping interest rates ultra-low and buying bonds. Many now expect the Fed to fight inflation with a series of rapid rate hikes, including a move of half a percentage point next month.

The rise in real interest rates increases the attractiveness of relatively safe investments, such as government debt, and at the same time damages the value of start-ups and companies with profits expected in the years to come. The S&P 500 is at its worst performance in April since 1970, when it fell 9.1% according to Dow Jones Market Data.

“We witnessed real interest rates explode higher and almost touch positive territory in the 10-year space, leaving equities extremely vulnerable,” said Brian Bost, co-head of equity derivatives at Barclays.

“‘There is no alternative’ is no longer a justification for hiding in stocks.”

Bonds have fallen this year, in a move that was faster than investors expected. The yield on the leading 10-year government bond is approaching 3% for the first time since 2018. Interest rate derivatives show that investors expect the Fed to raise its benchmark rate from the current level between 0.25% and 0.5% to just over 3% . next year.

“We went from not walking before 2023 to the Fed walking as much as 300 basis points in 2022. It has really been a cycle on steroids,” said Michael de Pass, global head of US Treasury Trading at Citadel Securities.

The rapid shift in expectations has weakened shares in low-profit technology companies and speculative efforts, including Cathie Wood’s flagship ARK Innovation exchange-traded fund. The ETF targets companies that it believes offer the greatest potential for innovation, such as Zoom Video Communications Inc..

and Coinbase Global Inc..

It gained popularity in 2020, when the Fed lowered interest rates and investors chased high returns in more risky places. Known by its ticker ARKK, the fund has fallen 20% since early April, bringing its year-to-date fall to 44% from Monday.

An inversion of the US financial yield curve has been seen as a warning sign of recession for decades, and it looks like it is about to light up again. WSJ’s Dion Rabouin explains why a reverse yield curve can be so reliable at predicting recession, and why market observers are talking about it now. Illustration: Ryan Trefes

Rising interest rates increase corporate borrowing costs and offer investors an alternative means of earning decent returns, which can hurt stocks in general. But the effect tends to be greater on so-called growth stocks because investors consider uncertain future profits to be less valuable when they can get more guaranteed income from Treasurys.

“For the first time in a while, fixed income is likely to look attractive in relation to more risky assets such as the stock market,” said Lisa Hornby, head of US multi-sector interest income at Schroders..

Ms. Hornby said interest rates could still move higher depending on upcoming inflation data. ‘I think we’ve priced 80 per cent of the move. Does that mean we are on top yield? Probably not, but we’ve done a lot of the work. ”

Wall Street strategists note that real interest rates remain low by conventional standards and have room to rise as the Fed raises interest rates and inflation declines. Many remain convinced that a steady rise can significantly disrupt companies or stock prices.

“They are still extremely low from a historical perspective, suggesting that the Fed may have more work to do in tightening financial conditions before higher real interest rates begin to have a significant impact on business activity,” said Gennadiy Goldberg, senior US official. interest rate strategist at TD Securities.

—Sam Goldfarb contributed to this article.

Write to Julia-Ambra Verlaine at

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