Meet the force behind TINA — the popular trader acronym for the notion that “there is no alternative” to stocks.
Real, or inflation-adjusted, yields on safe government bonds have remained persistently negative despite rising inflation, contributing to continued demand by return-hungry investors for stocks and other assets perceived as risky.
The concept is simple. “The more real yields fall, the better other assets look in comparison” to bonds, said Joe Kalish, chief global macro strategist at Ned Davis Research, in a phone interview.
And they have certainly fallen. The real yield on 10-year U.S. Treasury inflation-protected securities, or TIPS, hit an all-time low of -1.196%, based on data going back to 2003, on Nov. 9 and hasn’t moved far off that level since, according to Tradeweb, ending Friday at -1.136%.
The phenomenon, in the face of rising inflation pressures, has presented something of a head scratcher for investors and analysts. Kalish previously dubbed negative real yields “the biggest puzzle in fixed income.”
The strategist put some of those puzzle pieces together in a Nov. 16 note, identifying three main drivers behind negative yields:
- Investors looking for inflation protection have piled into TIPS. After all, TIPS are the only way for investors to directly hedge against inflation, as their principal amount automatically adjusts in line with CPI inflation. The Federal Reserve, of course, is also a buyer of Treasurys, helping to keep a lid on nominal yields.
- At the same time, the Fed has also been snapping up supplies of the inflation protected securities. The central bank holds 22% of all TIPS outstanding.
- Unrelenting demand for Treasurys from foreign buyers is keeping a lid on nominal yields despite rising inflation. U.S. nominal yields remain well above those for bonds in Europe, the U.K. and Japan. U.S. debt looks more attractive even after hedging for currency risk.
Negative and falling yields have certainly been accompanied by rising equity valuations and strong returns.
In a Nov. 1 note, Lori Calvasina, equity analyst at RBC Capital Markets, took a look at the performance of the S&P 500 stock index
SPX,
since the financial crisis of 2008, tracking it against real yields.
“On a 3-, 6-, and 12-month forward basis, equity market returns have been much stronger when real yields are falling and negative than when they are rising and positive,” Calvasina said (see chart below).
RBC Capital Markets
“This also helps explain, in our…
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