Us inflation-adjusted bond yields are close to turning positive as the Fed actively tightens monetary policy, putting further pressure on riskier assets in financial markets.

Real yields on US 10-year bonds have risen more than 1 percentage point since early March, hitting a high of-0.05 per cent on Monday, suggesting that interest payments on bonds are about to exceed expected inflation for the first time since March 2020, according to the Financial Times.

David Lefkowitz, head of US equities at UBS's chief investment office, said: "the Fed will drain liquidity. "the more speculative parts of the market benefit most when the Fed increases liquidity, and when the Fed moves in the opposite direction, they may face some," he said. Against the wind. "

Real yields on ultra-low-risk Treasuries plunged to negative in 2020, prompting investors to scramble for assets that still offer higher returns after taking into account inflation. As a result, share prices of lossmaking start-ups and fast-growing technology companies rose sharply from the trough in March 2020, and high-risk corporate bonds also rose sharply by the end of 2021.

However, the surge in real yields this year has prompted investors to reassess whether it is worth holding shares in companies that may not generate huge profits for many years. Goldman Sachs Group says some private start-ups have agreed to lower valuations, while shares of lossmaking technology companies have fallen more than 30 per cent this year.

The s & p 500, one of the benchmarks for measuring the performance of the us stock market, is down more than 7 per cent so far this year, as investors are rattled by rising real yields combined with severe inflation and uncertainty over the conflict between Russia and Ukraine. In the corporate bond market, the Ice Data Services index, which tracks returns on US junk debt, fell 6.3 per cent over the same period.

The jump in real yields this year reflects a surge in nominal yields driven by Fed tightening. The yield on the 10-year Treasury hit 2.899% on Monday, the highest level since December 2018. The Fed is expected to raise interest rates several more times for the rest of the year after raising interest rates by 25 basis points in March.

The Fed is seen as certain to raise interest rates by 50 basis points at its next monetary policy meeting in early May and may start shrinking its balance sheet to prevent inflation from spiralling out of control, followed by another 50 basis points at its June meeting.

James Bullard, chairman of the St. Louis Fed and a hawkish representative of the Federal Reserve, even said on Monday that the possibility of the Fed raising interest rates by 75 basis points at a time could not be ruled out, although this was not his basic scenario. Bullard has the right to vote on the Federal Open Market Committee (FOMC) this year.

The rise in US bond yields has exceeded inflation expectations, suggesting that investors believe in the Fed's ability to reduce disturbing inflation in the coming years. The 10-year break-even inflation rate, which measures market inflation expectations, has remained at about 2.75-3 per cent in recent weeks, well below the US consumer price (CPI) inflation rate of 8.5 per cent in March.

"there is reasonable confidence in the Fed's ability and willingness to fight inflation," said Ian Lyngen, capital markets strategist at Bank of Montreal.The crux of the question is not whether the Fed's response has been appropriately adjusted for current inflation, but that market participants believe the Fed will adjust policy if necessary."

The rise in real yields also shows the Fed's ability to tighten financial conditions. Not only are corporate borrowing costs soaring, but so are consumer mortgage rates. Us 30-year mortgage rates hit 5 per cent on average for the first time since early 2011, following a rise in 10-year Treasury yields, according to Freddie Mac.

John Madziyire, a portfolio manager at Vanguard, pointed out that despite the rise in interest rates, financial conditions were "still quite loose". "this may mean that the Fed needs to do more, but it is too early to draw conclusions. "

Given the current rapid rise in real yields, economists are divided over how much room to rise, but some warn that yields could jump again as the Fed tries to rein in inflation.

Higher yields have also prompted Barclays analysts to abandon their strategy of long 10-year Treasuries. The bank's Anshul Pradhan wrote in a note on Monday that recent comments from Fed officials have increased uncertainty about the extent of the tightening, and the steepening of the yield curve suggests that bond market traders are reducing bets that excessive Fed tightening will stifle economic growth.