Real yields in the U.S. Treasury market have gone even more negative as inflation surged, which is typically viewed as a positive factor for stocks, but Russia’s invasion of Ukraine has placed more emphasis on shedding risk than on the possibility of getting higher returns on Wall Street.
“If all else equal and you sat there and saw that one of the largest countries in the world is attacking a country one-third its size and it has aspirations to reconstitute the old Russian empire, is that really a good backdrop for stocks?” said David Petrosinelli, managing director and senior trader at broker-dealer InspereX in New York.
The 10-year TIPS yield has collapsed by roughly 64 basis points, since the release on Feb. 10 of U.S. consumer price data showing the annual U.S. inflation for January hitting a 40-year high. On Monday, the 10-year real yield dropped to a two-month low of -1.027%. “When real yields are falling, that means the expected value of a stock’s future cash flow is going to be higher. If you look at the sector breakdown of equities, if you look at the S&P 500 and compare its returns to big tech stocks or FANG stocks, they outperform the S&P on days when real yields fall,” he added, referring to the growth-stock grouping of Facebook, now known as Meta, Amazon, Netflix and Google-parent Alphabet.
Analysts said aside from the tumble in real yields, U.S. stocks have benefited from the view that the latest geopolitical turmoil means the Federal Reserve would take a gradual approach to tightening monetary policy, starting next week.