The US bond market has taken a key step towards returning to the "normalization" before the COVID-19 epidemic.

On April 20th the yield on inflation-adjusted 10-year benchmark US Treasuries, or TIPS, rose above zero to 0.008 per cent for the first time since March 2020.

Because real interest rates and inflation expectations cannot be directly observedIn practice, the nominal rate of return of TIPS is commonly used to measure the real interest rate in the United States.The difference between the nominal yield of treasury bonds of the same maturity and the yield of TIPS is the break-even inflation rate (BEI, Breakeven Inflation Rate), which is regarded as the implied inflation expectation of the market.

Recently, TIPS yields have been pushed to a three-year high as investors expect the Fed to continue to tighten policy.The positive 10-year TIPS yield means investors can still make positive returns on 10-year Treasuries after factoring in expected inflation.Earlier, TIPS yields had remained below zero for a long time as a result of the unlimited QE "flood" initiative launched by the Fed to offset the epidemic, which enhanced the attractiveness of the US stock market and pushed the S & P 500 to double its epidemic low.

However, rising bond yields are taking away the luster of the US stock market. By Tuesday's close, the s & p 500 was down 6.4% since the start of the year, while the 10-year TIPS yield had climbed more than 100bp. In response, Barry Bannister, chief equity strategist at Stifel, an independent US investment bank, said:

"as real yields rise, it reduces the attractiveness of stocks."

On the other hand, the signal from the bond market is also worthy of investors' attention. As shown in the figure below, changes in the three-month short-term interest rate futures curve showToday's market expectations have shifted to a faster pace of tightening, and the US recession is likely to begin in mid-2023.(compared with January, the proximal end of the curve was significantly steeper in April and reached a peak around June 2023, and then began to fall.) Generally speaking, the yield curve of short-term interest rate futures is one of the most accurate predictors of the business cycle.

On the basis that the economic downturn is expected to lead to a decline in the expected corporate profit growth, the impact of higher risk-free interest rates is superimposed, and the risk of lower equity risk premium ERP is also worthy of investors' attention (can be simply understood by E (r) = Rf+ β * ERP). The ERP index is at its lowest level since 2010, according to a report last week by Truist Advisory Services, an investment consultancy.

In this contextIt's time for global investors to fasten their seat belts.--High-risk assets may face revaluation in the short termStartups and technology companies may bear the brunt.The reason is also simple: judging from the widely adopted dividend discount (DDM) valuation system, high-risk growth stocks naturally discount more because most of their expected returns occur at the distal end.

Empirical research also reflects this: since 2018, the ratio of Russell 1000 growth index to Russell 1000 value index (cash flow is closer) is negatively correlated with 10-year real interest rates, and the correlation coefficient is as high as 0.96, according to Reuters. In response, Ohsung Kwon, a U.S. equity strategist at Bank of America's global research team, said that means they tend to move in the opposite direction to growth stocks:

"this is a headwind for the stock market."

In addition, Reuters warned that although stock valuations have been "moderated" by the "plunge" in the stock market this year, the S & P 500 is still trading at 19 times forward earnings, up from its long-term level of 15.5.

However, some investors believe that even if real yields turn to pose a threat to stock market valuations in the short term, the stock market remains "fearless" in the long run. The reason: real returns have mostly been in a positive range over the past decade, but the s & p 500 is up more than 200% over the same period, while the tech-heavy NASDAQ is up more than 380%.