(Bloomberg) -- The 10-year U.S. yield adjusted for inflation rose to its highest level in more than seven months, a warning sign for riskier assets that have benefited from exceptionally loose financial conditions amid the pandemic.
The rate, or real yield, climbed over five basis points to minus 0.7352% -- surpassing a high of minus 0.75% set days after the U.S. presidential election in November. While higher real rates signal the economy is gaining traction, they can feed in to steeper borrowing costs and lessen the appeal of other asset classes including stocks, which are currently trading near all-time highs.
“While risk assets continue to find buyers on pretty much any and every dip, the upward shift in real yields largely driven by oil and commodity price offer grounds for caution,” said Marc Ostwald, global strategist at ADM Investor Services. “The U.S. 10-year nominal yield at 1.40%, too, is now only a shade below the S&P 500 dividend yield,” a popular valuation metric for equities.
Rising real rates are a concern for policymakers the world over given that markets are being propped up by abnormally easy monetary and fiscal policy. While Federal Reserve Chairman Jerome Powell this week called the recent run-up in bond yields “a statement of confidence” in the economic outlook, unease among investors has been building in recent weeks over the sustainability of the recovery, and whether the stimulus will feed into ever higher prices.
Powell Goes Easy on Surging Yields While Central Bank Peers Fret
Other economic leaders are also making clear their disquiet. The European Central Bank has a close eye on financial markets because a sudden rise in real interest rates could pull the rug out from under the economic recovery, Executive Board Member Isabel Schnabel said in an interview published Thursday.
The Bank of Korea warned it will intervene in the market if borrowing costs jump, while Australia’s central bank resumed buying bonds to enforce its yield target and the Reserve Bank of New Zealand Wednesday promised a prolonged period of stimulus even as the economic outlook there brightens.
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