Investors say a spike in real yields — the return bond investors can expect once inflation is factored in — rocked markets in early 2022 and caused surging tech stocks to pull back.

The yield on inflation-linked 10-year U.S. government bonds has surged 0.24 percentage points to minus 0.86% since the end of December, as investors anticipated the end of the Federal Reserve’s bond-buying program and the revival from the U.S. central bank this year.

The move comes at a time when investor fears of high inflation over the next decade have eased, or at least more confidence that the Fed can rein in price increases.

Real yields have risen more than regular U.S. Treasury yields through 2022. That meant the gap between the two — known as breakeven, a closely watched measure of inflation expectations by investors — fell slightly by 2.58 percentage points from 2.60 percent.

Amid the bond market turmoil, investors say the biggest concern for riskier assets is the rise in real yields, which has led to declines in everything from stocks to bitcoin, in line with the pandemic The “everything bounces back” is the opposite, when real yields plummeted. linked to returns on various assets.

Seema Shah, chief strategist at Principal Global Investors, said: “Real yields are what really weighs on the market, and seeing them rise will really test risk assets.”

For investors, the higher real yields on ultra-low-risk government bonds make other assets relatively less attractive. This logic is especially painful for those overvalued stock markets that benefit the most from extremely low interest rates.

The tech-heavy Nasdaq Composite had its worst start since 2016, falling more than 3 percent in its first session of the year.

Losses have been steeper for money-losing tech companies and businesses that have only recently gone public, according to the closely-watched Goldman Sachs index. Shares of the nonprofit tech company are down 7% so far this year, while IPOs have fallen about 9% over the past year.

Higher real yields could also lead to higher borrowing costs for companies, analysts said.

“Real yields tell you the true level of funding costs and not hide behind inflation, so we’re going to learn a lot about the true health of corporate balance sheets,” Shah said.

Research by Deutsche Bank analyst Jim Reid shows that corporate credit spreads — the extra yield investors are asking companies to lend to them compared to the U.S. government — have become more correlated with real yields in recent years. Comes higher and tends to expand as real yields climb.

Reid argues that highly indebted companies are sensitive to changes in real yields because they are a better indicator of the sustainability of corporate debt burdens than nominal yields.

U.S. real yields fell to an all-time low in 2021 as investors jittered over soaring inflation, pouring a record $70 billion into funds holding inflation-protected government bonds (Tips) during the year, data showed. Dollar. From EPFR.

Some analysts also attribute some of the change in real yields in 2021 to limited supply: The Fed buys $6.5 billion in monthly tips through its quantitative easing program, limiting the bonds available to ordinary investors. The central bank owns about 22% of outstanding tips, up from 9% in early 2020.

As the pace of Fed purchases slows and ends in the coming months, Tips prices are likely to slide — dragging down real yields, said Sam Lynton-Brown, head of developed markets strategy at BNP Paribas. That could exacerbate the rise in real yields.

“You’re really talking about rising funding costs across the economy,” said Antoine Bouvet, ING rates strategist. “Unless people become more optimistic about growth, this is a concern for risk assets.”