A big pandemic-era distortion in the world of finance is well and truly over — and the new normal is helping fuel the worst cross-asset selloff in decades. After being trapped in negative territory during the lockdown days, inflation-adjusted Treasury yields are again breaking out, with five- and 10-year measures back near multiyear highs.
All this is bad for news for money managers across the board, with rate-sensitive allocations harder to justify from tech stocks to long-maturity corporate bonds. Rising real yields — seen as the true cost of money for borrowers — are rippling through the economy as mortgage rates soar while Corporate America adjusts to the higher cost of doing business.
It could get a whole lot worse. The thinking among Wall Street traders is that a hawkish-at-all-costs Federal Reserve is increasingly determined to engineer tighter financial conditions — via lower stock prices and higher bond yields still — in order to combat raging inflation. That suggests investors in just about every asset class risk fresh market chaos, as Goldman Sachs Group Inc. projects 10-year real yields are moving closer to levels that would materially restrict economic activity.
Conclusion: The near term future involves market crashes once the mainstream wake up to the fact that every quarter going forward is going to be much worse than the one before, and optimism vanishes. Stocks, Corporate bonds, Oil, Commodites, Crypto, most Currencies, all going to get ugly at the same time. In ~October.