In a striking echo of the financial aftermath that ensued after the collapse of Lehman Brothers in 2008-2009, real yields on US government bonds have surged to their highest levels. Market expert Larry McDonald, founder of the “Bear Traps Report,” highlighted this alarming trend on Tuesday, underscoring that the real yields have breached the 185 basis points (bps) mark, marking a significant escalation since the historic crisis in the US.
The upswing in real yields holds profound implications for the economy, signaling an impending period of turbulence. Real yields, calculated by subtracting the prevailing inflation rate from the interest rate returns of a government bond, offer a crucial glimpse into the economic landscape. This surge threatens to raise the burden on borrowers, amplifying the challenges they face, while simultaneously bolstering the attractiveness of bonds over stocks for potential investors.
Wednesday saw a noteworthy escalation in this trajectory, with yields on 10-year inflation-protected Treasuries soaring to 1.89%. This peak is the highest observed since the mid-2009 period, magnifying the seriousness of the situation. The Federal Reserve’s strategy of hiking benchmark rates by a substantial 500 basis points since 2022, while aiming to stabilize the consumer price index at the 2% target, has given rise to concerns about a possible recession characterized by an inverted yield spread.
The prospect of history repeating itself looms large, as the recent surge in real yields serves as a clear cautionary sign for prospective investors. The mounting evidence points towards an expansion of rising real yields, driven by either the necessity for a market correction or the imperative to counter further inflationary pressures. In these uncertain times, a prudent investor would be well-advised to navigate the impending storm with vigilance.
Market analyst Larry McDonald emphasized that inflation-adjusted bond yields in the US have not surged to such heights since the fallout from Lehman Brothers’ collapse in the late 2000s. The concept of real yields, encapsulating the net interest rate gains from a government bond after accounting for inflation, holds a comprehensive insight into the overall cost of borrowings within an economy. This surge in yields amplifies the appeal of bonds in comparison to stocks, setting the stage for potential market shifts.
As investors brace for the prospect of the Federal Reserve maintaining elevated interest rates in a bid to curtail inflation, concerns about the economy’s trajectory continue to mount. A cautionary signal was sounded with the emergence of an inverted yield spread between the 2-year and 10-year Treasury notes. The implications of this phenomenon for the future economic landscape remain uncertain, but investors are wise to heed the warning signs emanating from the ascent of real yields.
While the unfolding events will ultimately reveal the path the economy takes, investors are well-advised to remain attuned to the escalating real yields. This uptick raises pertinent questions about the stability of the financial market and serves as a call to action for investors to assess their strategies with a discerning eye. The journey ahead is fraught with uncertainties, but the heightened real yields serve as a stark reminder that foresight and caution are imperative in these volatile times.
Source: Yahoo Finance
