Bloomberg
(Bloomberg) -- Yields on U.S. debt blew past another set of closely-watched levels, a warning sign for riskier assets that have benefited from exceptionally loose financial conditions amid the pandemic.The 10-year U.S. real yield -- which strips out inflation and is seen as a pure read on growth prospects -- climbed eight basis points to minus 0.71% on Thursday, surpassing a high of minus 0.75% set days after the U.S. presidential election in November. Nominal yields also soared, with the rate on 10-year Treasuries rising to as high as 1.47%, the highest reading in a year. Its 30-year counterpart hit a similar milestone, climbing rapidly above 2.30%.It’s been a frenetic week for bonds globally, with yields climbing to levels last seen before the coronavirus spread worldwide. Central banks have attempted to soothe markets, with European Central Bank chief economist Philip Lane saying the institution can buy bonds flexibly and Federal Reserve Chairman Jerome Powell calling the recent run-up in bond yields “a statement of confidence” in the economic outlook. While higher real rates signal growth is gaining traction, investors are growing uneasy over the sustainability of the recovery, and whether stimulus will feed into ever higher prices.“While risk assets continue to find buyers on pretty much any and every dip, the upward shift in real yields largely driven by oil and commodity prices offer grounds for caution,” said Marc Ostwald, global strategist at ADM Investor Services. “The U.S. 10-year nominal yield at 1.40%, too, is now only a shade below the S&P 500 dividend yield,” a popular valuation metric for equities.Convexity HedgingAdding to the bond rout are forced sellers in the $7 trillion mortgage-backed bond market, who are likely unloading the Treasury bonds they hold with long maturities or adjusting derivatives positions to compensate for the unexpected jump in duration on their mortgage portfolios. It’s a phenomenon known as convexity hedging, and the extra selling has a history of exacerbating upward moves in Treasury yields -- including during major “convexity events” in 1994 and 2003.Convexity Hedging Haunts Markets Already Reeling From Bond RoutOver in Europe, peripheral countries have led a sell-off in the region, with Italy’s 10-year yield spread over Germany climbing back above 100 basis points. Core debt was not spared from the rout, with yields on France’s benchmark debt turning positive for the first time since June.Clear DisquietEconomic leaders the world over are making clear their disquiet. Apart from ECB’s Lane, Executive Board Member Isabel Schnabel weighed in, saying in an interview published Thursday that the central bank has a close eye on financial markets because a sudden rise in real interest rates could pull the rug out from under the economic recovery.Powell Goes Easy on Surging Yields While Central Bank Peers FretElsewhere, the Bank of Korea warned it will intervene in the market if borrowing costs jump, while Australia’s central bank resumed buying bonds to enforce its yield target and the Reserve Bank of New Zealand Wednesday promised a prolonged period of stimulus even as the economic outlook there brightens. Emerging market investors, meanwhile, are fixated on the where short-end U.S. yields go which could halt market resilience there.The latest leg of the bond selloff has drawn only a mild reaction from equity markets. S&P 500 futures fell 0.4%, while the Stoxx 600 Europe index erased earlier gains of as much as 0.5%. Yet investors are increasingly on guard for a pullback in stocks, with an eye on the pace of the moves in real yields.“You have to look at real yields,” Christian Nolting, chief investment officer at Deutsche Bank Wealth Management, said in a Bloomberg Radio interview. “If real yields are really rising and rising fast, that in the past has always been an issue for stocks. So it’s very important to watch.”(Adds context and price action throughout.)For more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2021 Bloomberg L.P.
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