Because rising Treasury yields are plaguing the stock market ahead of the Fed’s next rate hike

Yields are rising in the U.S. and around the world, driven by central banks’ imperative need to hold on to inflation, which is leaving the once perpetually popular trade that favors equities over other asset choices dead. now dead.

That trade, known as TINA, which stands for “there is no alternative” to equities, has long been considered vulnerable since the start of the 2020 pandemic era.
4.074%
and 2 years TMUBMUSD02Y,
3.962%
they are testing 4%, a level believed to be creepy across the financial market, and a dozen central banks are all ready to make decisions in the next 48 hours as part of a global tightening campaign.

The yield of the TMBMKGB-10Y gilt at 10 years,
3.294%,
the UK Treasury counterpart hit a new 11-year high on Tuesday, while US 5- to 30-year real yields, which impact the real cost of capital for companies after accounting for inflation, rose to the highest level. high in recent years.

Laws : Goodbye Tina? Because stock market investors can’t afford to ignore the rise in real yields.

Shares took another hit on Tuesday, with Dow industrials falling a whopping 459 points to the session low, one day before the Federal Reserve’s widely anticipated rate decision. Investors are mainly bracing for another aggressive rate hike of 75 basis points, which would raise the federal funds rate target between 3% and 3.25%, as well as indications of more to come. Yep, all three major US stock indices DJIA,
-1.55%

SPX,
-1.61%

COMP,
-1.39%
they are down about 16% to 27% for the year, joining their Asian and European counterparts in the red.

Traders see a good chance that the fed funds target range will hit 4.25% to 4.5% by December, above previous expectations, which is likely to hit the equity price-to-earnings ratio.

With the Fed still raising rates in a weakening economy, “TINA is dead for the time being,” said John Silvia, founder and CEO of Dynamic Economic Strategy in Captiva Island, Florida. “The hike in T-bills rates, the 2-year yield and quality corporate debt rates have now become competitive with S&P earnings. So, if I am an investor, my return on T-bills and corporate debt is equal to my earnings on my stock portfolio. ”

Meanwhile, real or inflation-adjusted yields, as indicated by inflation-protected 5-year and 10-year Treasury rates, rose to 1.3% and 1.2%, respectively, starting from Tuesday morning, the highest levels in more than 11 years, according to Tradeweb data.

The rise in real rates reflects a cost of borrowing. But they will likely have to increase by one to two percentage points each, “which is a significant challenge because that’s the true cost of financing, whether it’s a single-family home or a company that buys equipment,” Silvia said on the phone Tuesday. .

In fact, Goldman Sachs GS strategists,
-2.41%
warn that shrinking profit margins could pose a downside risk to equity market returns, while Morgan Stanley’s Michael Wilson suggests that “reality” has not yet been assessed.

This all comes when a dozen central banks around the world come together this week, with Tuesday leading to a surprise 100 basis point rate hike from the Swedish central bank. Deutsche Bank’s Jim Reid estimates global rate hikes totaling 500 basis points will occur in the next 48 hours, starting Tuesday morning, which he describes as “an unprecedented hawkish period for central banks.”

Source: Bloomberg, Deutsche Bank

The result is “a very difficult environment, with many central banks all shrinking at the same time, something we haven’t really had in many, many years,” Silvia, the former chief economist at Wells Fargo Securities, told MarketWatch. ‚ÄúThis is creating an uncertain environment for the global economy, an uncertain path of political change, uncertainty that there will be a financial breaking point and the feeling that anything can happen. You’re like Indiana Jones in the Colombian jungle and you don’t know what the hell is around the corner. ”

It sees a one in five to one in ten chance that a financial crisis will manifest “fairly quickly” and be transmitted by the financial market amid constant corporate profit warnings and a refinancing shock to highly indebted companies.

In April, when the 10-year real yield intermittently went above zero for the first time since the start of the pandemic in 2020, Silvia warned that such a development would be bad news for investors in risky assets such as equities. Since then, all three major US indices have fallen.

In June, Silvia said financial markets and the Fed should have accepted higher inflation or the idea that policymakers pursued higher interest rates to fight inflation.

Then, in July, when financial markets began trading believing that inflation had peaked, Silvia said that investors were probably underestimating the persistence of inflation. Her remarks came ahead of a warmer-than-expected US Consumer Price Index reading for August.

– Isabel Wang contributed to this article.

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