The enthusiasm for the riskier corners of the market has sent stock indices and cryptocurrencies to record highs. A powerful driver, investors say, is rising inflation and its effect is to suppress returns on safe government bonds, a staple of stocks.
Last week so-called real yields, which take into account the corrosive effects of inflation, hit some of their lowest levels on record. According to TradeWeb, a measure of real yields, 10-year Treasury inflation-protected securities fell to minus 1.2%. As of February 2003 data, this is the lowest on record.
In short, with real returns being negative, the purchasing power of the money invested will decrease over the lifetime of those bonds.
The actual yield has declined due to the clashes. These include the highest inflation rate in three decades combined with nominal bond yields that have risen only marginally as central banks hold back from raising rates.
The potential for negative returns on highly secured inflation-protected bonds has prompted investors to buy riskier assets.
“With real yields, the lower they are, the more it encourages speculation,” said Lorenzo Di Mattia, chief investment officer at hedge fund Sibilla Capital. With inflation lowering the cash value, investors are increasingly motivated to put their money to work, he said.
Shares of electric-vehicle startup Rivian Automotive were up 29% when they began trading on Wednesday. They rose again on Thursday and Friday, giving the firm a larger market value than a major shareholder, Ford Motor Co., while Rivian only began delivering vehicles in September.
Cryptocurrency has boomed. According to CoinDesk, bitcoin hit a record low last Tuesday, trading at $68,525 on Tuesday. While major stock indexes edged lower last week, they were down less than 2% from all-time highs.
Inflation has been a primary concern in markets in recent months, as investors and analysts seek to understand whether the pandemic-induced supply chain snares and labor shortages will prove to be short-lived.
Developed market central banks say the surge will be temporary. Federal Reserve and European Central Bank officials pushed against market expectations of interest rate hikes in recent weeks. ECB president Christine Lagarde also said earlier this month that her institution was unlikely to raise rates next year.
In Europe, the German real yield fell to minus 2.2%, near its lowest level on record.
Shaniel Ramji, a multiasset fund manager at Pikett Asset Management, breaks down growth stocks like green technology companies and takes more risk by adding stocks to small-cap companies.
“The actual yield being more negative encourages more risk-taking,” Mr. Ramji said. As inflation is increasingly likely to eat into portfolios, investors pile into riskier investments with potentially higher returns to try to offset it, he said. “I think this has been a driver of the recent move in equities.”
As real yields have declined, technology stocks that have little future growth potential have benefited the most. The tech-heavy Nasdaq Composite Index is up nearly 10% over the past month, nearly doubling the growth in the Dow Jones Industrial Average, which holds a higher weighting of old-line financial and industrial companies.
As for cryptocurrencies, their performance in an environment with rising consumer prices has not been more evident. Investors and analysts are divided on whether their values are driven by how much risk investors are comfortable taking or if they also hedge against inflation. Their track record isn’t great: Bitcoin sold off at the start of the year amid rising concerns about a price hike.
“The low-yield, risk-on environment has been favorable to crypto,” said Joel Kruger, currency strategist at currency and cryptocurrency exchange LMAX Group. But if inflation rises to the point where the Fed may need to raise rates, he said That by cutting credit from the economy, it could affect risk taking in general, including crypto.
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