The US bond market took another crucial step towards normal trading before the COVID-19 epidemic, with the inflation-adjusted benchmark US Treasury yield, the US 10-year inflation protected bond (TIPS), rising above zero for the first time since March 2020.

The real rate of return returns to positive.

A return to positive yields on inflation-protected bonds means investors will still be able to break even on US Treasuries 10 years later after factoring in expected inflation. Investors expect the Fed to continue to tighten policy, pushing Treasury yields to a three-year high. Previously, by keeping real yields below zero, the Fed tried to offset the weak economic outlook for corporate closures and layoffs as a result of the spread of COVID-19.

Zitong Financial APP learned that real yields on 10-year Treasuries continued to climb in early Asian trading on Wednesday. While 10-year us bond yields are heading towards 3 per cent, the highest level since December 2018, traders continue to bet that the fed will adopt a series of aggressive monetary policies.

Andrew Ticehurst, interest rate strategist at Nomura Securities in Sydney, said: "this shows that we have gone far beyond the COVID-19 epidemic crisis and the monetary policy threshold deployed to combat the crisis and are returning to more normal levels." "the current sharp rise in US 10-year Treasury yields is mainly driven by higher real yields rather than higher inflation expectations."

Andrew Ticehurst added that this could indicate that most investors in the market believe that an increase in the number of Fed rate increases will help stabilize current inflation expectations in the US.

Neutral interest rate

The Fed's aggressive hawkish stance is driving a significant reversal in 10-year real yields, which were below-1 per cent in March after the escalation of the conflict between Russia and Ukraine. Fed officials raised the benchmark interest rate by 25 basis points last month and hinted that it would rise at a relatively rapid pace for the rest of the year.

Swap traders expect the Fed to raise interest rates by about 140 basis points in the next three meetings, suggesting they expect at least two increases of 50 basis points, the last time the Fed raised rates by 50 basis points or more in August 1984.

Yesterday, Chicago Fed Chairman Evans said the Fed may raise interest rates above the neutral level, that is, 2.25-2.5% of the "neutral" level, which is what most Fed officials now think of as neutral. Under neutral interest rate expectations, the Fed may continue to raise interest rates aggressively, so there is still room for US 10-year inflation protected bond yields to climb.

Bets on higher interest rates have also helped reduce the size of global negative-yield debt by nearly $9000bn to less than $2.7 trillion this year.

Adjusted for inflation, US bond yields have been negative for two years in a row, providing a key support for the stock market boom to some extent. The rise in real yields erodes the market's preference for risky assets, particularly threatening the overall valuation level of the stock market and its attractiveness relative to bond prices.