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Real bond yields—the return investors make on bonds after inflation takes its cut—have been rising, luring investors away from tech stocks and causing their share prices to slide, analysts told the Financial Times.
Share prices for tech stocks not showing a profit are down 7 percent this year; last year’s IPOs are down an average of 9 percent.
During the first 11 days of January, the yield on treasury inflation-protected securities (TIPS) rose 0.24 percent to -0.86 as investors aligned their portfolios with expectations that the U.S. Federal Reserve will raise interest rates steadily through this year, perhaps as many as four times (see related story in this issue).
Investors are more confident that the Fed will lasso inflation and, therefore, are less worried about it than before the Fed committed last month to a specific course of action, the FT said.
Real yields on TIPS have risen more than those for ordinary treasury securities so far this year.
The rise in real yields heightens risk for prices of riskier assets, such as tech company shares or Bitcoin, a reversal of 2020’s investment landscape when real yields collapsed and tech stocks and high-risk, high-yield assets such as cryptocurrencies soared.
Higher real yields on government bonds, which carry very low risk, make more chancy alternatives less interesting.
“Real yields are what is truly impactful for markets and seeing them rise will really test risk assets,” Seema Shah, Principal Global Assets’ chief strategist, said to the FT.
However, real yields also are likely to ultimately lead to higher corporate borrowing costs, analysts told the FT.
“Real yields tell you the true level of funding costs without hiding behind inflation, so we’re going to learn a lot about the genuine health of corporate balance sheets,” Shah said.
TREND FORECAST: Loans will be popular investments, but businesses will be far more conservative in borrowing now that the U.S. Federal Reserve will be taking interest rates higher.
Companies able to borrow will do so sooner instead of later, using loans to make purchases now before prices rise, then paying off their loans later with dollars that inflation has made cheaper.