Laura Banks
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Here’s the ‘real’ reason stock-market investors are worried about bond yields

Investors looking to blame the stock market’s recent wobble on rising Treasury yields might want to look a little deeper.

While the 10-year Treasury yield’s TMUBMUSD10Y, +0.00%  upward march toward 3% is attracting attention, analysts say risky assets like equities aren’t responding to higher nominal bond yields, but are instead taking their cue from the rise in “real,” or inflation-adjusted yields. The real yield is the difference between the advertised yield on a bond and expectations for future inflation.

“Real rates are now at a point where further…increases will impinge on risky asset market performance in the absence of economic data that meets or beats elevated expectations,” said Matthew Hornbach, global head of interest rate strategy for Morgan Stanley, in a note earlier this week.

On several gauges, “real” yields have risen to their highest levels in several years. The 5-year real yield rose to 0.74%, double what it was at the beginning of the year. While, the 10-year real yield rose more than 30 basis points to 0.82% in 2018, its highest since Dec. 2015, but well below pre-2008 levels, as the chart below shows.

Real yields have swung higher, but are historically subdued