In a significant market development, the yield on the 10-year U.S. Treasury note surpassed the rate of inflation for the first time in more than three years. With the current yield at 4.04% and inflation recorded at 4% year-on-year in May 2023, this milestone signals a crucial market shift.
The difference between Treasury yields and inflation, also known as the real yield or real rate, is a crucial indicator of market risk sentiment.
Negative real yields indicate that investing in government bonds results in a loss when accounting for inflation. This typically prompts investors to seek higher returns in riskier assets like stocks, as bonds offer no protection against inflation.
However, when bond yields surge above inflation, the dynamics change dramatically. Holding the traditionally safe-haven asset of U.S. Treasury bonds now provides a yield that matches or even exceeds the inflation rate.
This can have a profound impact on the incentive to invest in risky assets, such as stocks or high-risk corporate bonds.
The iShares 7-10 Year Treasury Bond ETF IEF is an exchange-traded fund that provides exposure to the portion of the Treasury yield curve containing 10-year maturities.
The surge in real yields marks a notable shift from the deeply negative levels observed just last summer, where they reached more than 6%.
This reversal has the potential to generate significant tremors in the financial market landscape, impacting investment strategies and asset allocations.
Chart: US 10-Year Yields Now Outpace Inflation
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