Yields on government bonds are catching up with expected inflation after years of lagging behind it, a threat to the speculative stock-market bets that proliferated in the era of rock-bottom rates and economic stimulus.
Bond yields that trail inflation push investors to seek an alternative; many found it in the stock market, powering a surge in risky assets.
Often known as real yields, the yields on TIPS fell deeply negative at the start of the pandemic, meaning investors were guaranteed to lose money on an inflation-adjusted basis if they held the bonds to maturity. That helped power a surge in stocks by pushing investors toward riskier assets for better returns.
Now analysts expect that time to end, with central banks pulling back from their efforts to stimulate economic growth by holding rates ultralow and buying bonds. Many now expect the Fed to fight inflation with a series of rapid rate increases, including a half-percentage point move next month.
That rapid shift in expectations has dented shares of low-profit tech companies and speculative wagers including Cathie Wood’s flagship ARK Innovation exchange-traded fund. The ETF targets companies it believes offer the greatest potential for innovation such as Zoom Video Communications Inc. and Coinbase Global Inc. It gained popularity in 2020 when the Fed cut rates and investors chased high returns in riskier places. Known by its ticker ARKK, the fund has plunged 20% since the beginning of April, bringing its year-to-date decline to 44%, as of Monday.
“For the first time in a while fixed income probably looks attractive relative to riskier assets like the stock market,” said Lisa Hornby, head of U.S. multi sector fixed income at Schroders.
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