Real yields have risen steadily as rates have risen and inflation has decelerated. All of this could influence Jerome Powell’s choices.
As yields rise, equities are facing competition from bonds in a way they haven’t for a decade and a half.
The US 10-year government bond yield hit 4.25%, up 0.3% since early August and close to its highest level since 2007. That’s a good return, especially considering that stocks look expensive.
There are several forces behind the latest increase in yields. Some are largely technical: the US Treasury issuance was larger than normal this month, the Bank of Japan just allowed yields to climb slightly, and rating agency Fitch downgraded the US sovereign rating on August 1st.
Other forces are related to the ever-changing expectations of Federal Reserve policy. Stronger-than-expected data on retail sales, construction starts, and industrial production supported soft landing for US economy hypothesis: Atlanta Federal Reserve’s GDPNow tool predicts growth of gross domestic product by 5.8% during the third quarter.
But broader growth could fuel inflation, prompting the Fed to hike interest rates further or keep them at tightened levels for longer, both of which would boost bond yields.
And it’s not just nominal bond yields that have risen recently. Real yields, adjusted for inflation, have risen steadily as rates have risen and inflation has decelerated. The yield on 10-year inflation-protected US Treasuries was negative until May of last year. But last week it hit 2%, its highest level since 2009.
Current yields will look particularly attractive should signs of peak inflation and slowing growth return, which would reduce the likelihood of continued Federal Reserve tightening and lower both real and nominal yields. And bonds at current levels would have the potential to enjoy a decent capital gain if the situation deteriorates significantly, triggering a recession scare, Fed cuts, and a flight to security in fixed-income securities.
Equities, however, may find themselves in a disadvantageous position. Rising yields will hurt valuations, but a slowdown in the US or elsewhere, especially in the Chinese economy, could also cause a decrease in the S&P 500.
But everything seems subordinate to the speech that the president of the Federal Reserve, Jerome Powell, will give at Jackson Hole. His words alone could determine whether yields continue to rise and stocks continue to fall. “Equity markets will remain under pressure as the 10-year bond yield is rising,” notes Dennis DeBusschere, lead market strategist at 22V Research.
Original article published on Money.it Italy 2023-08-25 07:00:00. Original title: Fed, ecco cosa succederà sui mercati dopo la riunione a Jackson Hole
