US bond sell-off stirs warnings over stock market strength

amp.ft.com
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Investors say a further sharp rise in yields would threaten Wall Street's record run
The drop in US government bond prices in the opening weeks of 2021 poses a threat to Wall Street's record run, analysts and investors have said.

High prices and vanishingly slim yields on Treasury bonds have provided a key support for equities since the shock of the coronavirus outbreak last year. But, stung by expectations for rising inflation, yields have swept higher, with the 10-year benchmark yield briefly touching 1.3 per cent this week, from a little above 0.9 per cent at the start of the year. Already, February is shaping up to provide one of the biggest monthly increases in yields since 2018.

Investors are now scrambling to identify the potential tipping point for equities.

"If we see a gradual increase in yields over the course of this year and next year, that is something the equity market is happy to digest," said Kiran Ganesh, a multi-asset strategist at UBS Global Wealth Management. "If things happen a bit more quickly . . . that could lead to more substantial problems."

The prospect of a $1.9tn stimulus package coming out of Washington, pent-up demand from months of social curbs, and loose monetary policy from the Federal Reserve have pushed inflation expectations to their highest in years. One metric derived from US inflation-protected government securities — the 10-year break-even rate — recently rose to its highest point since 2014, at 2.2 per cent.

So far, however, the core personal consumption expenditures price index, the Fed's favoured measure of inflation, stood at 1.5 per cent as of December, below the central bank's long-term target. In January, the core consumer price index, another measure of inflation, was flat compared with the previous month.

Inflation is kryptonite to bonds, eating away at the value of their fixed payments to investors.

For stocks, moderate inflation is typically a…
Aziza Kasumov and Colby Smith in New York
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