U.S. Treasury Update

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After the inflation rate of the world’s most important government bond fell to a record low, the return investors expected had a wide-ranging impact on the global market.

The real yield on the 10-year U.S. Treasury bond fell further to below zero on Monday, as growing concerns about the prospects for economic growth have exacerbated the recent bond market rebound.

The real rate of return—a measure of investors’ expected returns after taking inflation into account—dropped to minus 1.127%, as stock market sell-offs drove Asian investors toward safe government bonds.

The real rate of return in the Eurozone also hit a record low on Monday, and the 10-year real interest rate swap, a key indicator of the future interest rate of the entire currency group, touched negative 1.65%.

Negative real yields pose a big problem for pension funds and other long-term asset allocators, who are also struggling to deal with stock markets that trade at high valuations.

One effect of negative real yields is to boost a range of other asset classes because they make the returns they provide more attractive than bonds.Last year, investors stated that record low real yields are driving “Everything is ready” From gold to the stock market.

The continued rise in the bond market in the past few weeks has surprised many investors, who have been betting that yields will rise further after the sharp sell-off at the beginning of the year.

Although many people point their fingers at investor positions and light summer trading conditions to explain these trends, they have also been reassessed by their optimistic global growth expectations because Delta coronavirus variant spread.

Nominal bond yields have fallen sharply from their highs in March, when inflation expectations fell only slightly, and actual yields were lower than last year’s record low.

The 10-year breakeven rate in the United States-the gap between the actual rate of return and the nominal rate of return, as a measure of investor inflation expectations in the next ten years-was 2.33% on Monday, lower than the level of more than 2.5% in May Situation, but still higher than the Fed’s 2% target.

Citigroup global macro strategist Jamie Fahy (Jamie Fahy) said: “Although the underlying growth background is very strong, the market has shifted from considering re-inflation to worrying about stagflation.”

The market’s unease intensified before Wednesday Federal Reserve Policy Meeting, Chairman Jay Powell may provide clues about the timetable for the U.S. Central Bank to end its bond purchase program, which supported the market during the pandemic.Traders lowered their expectations of how quickly the Fed will act Raise interest rates In the context of more uncertain economic prospects.

Peter Chatwell, director of multi-asset strategy at the Federal Reserve, said that the longer-term prospect of minimum interest rates is a factor in the decline in real yields and shows that the Federal Reserve and other central banks will be more tolerant of rising inflation expectations. Mizuho.

He said: “The actual rate of return tells us the truth about how Fed policy will translate into fairly high inflation in the medium term.”