Rising real yields are driving the stock market selloff
Inflation expectations (T10YIE, red line) have been on the rise since Q1 2020. Nominal yields (US10Y, turquoise line) bottomed as gold (XAUUSD, yellow line) topped in Aug 2020 after the Fed marked the end of stimulus expansion, shifting speculation to timing the eventual tightening.
However, stocks (ESH2022, S&P 500 future, purple line) did not turn lower until Dec'21-Jan'22 as *real* interest rates (DFII10, orange line) started to rise. This is as the markets began to believe the Fed's hawkish rhetoric, so inflation expectations came down while nominal yields pushed upward.
Higher real yields drive portfolio de-risking. Investors are able to achieve a comparatively lower risk profile given a level of expected return, so assets toward the "risk-on" side of the spectrum suffer relative to anti-risk alternatives.
However, stocks (ESH2022, S&P 500 future, purple line) did not turn lower until Dec'21-Jan'22 as *real* interest rates (DFII10, orange line) started to rise. This is as the markets began to believe the Fed's hawkish rhetoric, so inflation expectations came down while nominal yields pushed upward.
Higher real yields drive portfolio de-risking. Investors are able to achieve a comparatively lower risk profile given a level of expected return, so assets toward the "risk-on" side of the spectrum suffer relative to anti-risk alternatives.
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