(Fixes spelling error in 9th paragraph for Wessel

By Gertrude Chavez-Dreyfuss

NEW YORK, (Reuters) –The real yields of the U.S. Treasury Market have gone down as inflation rose, which is usually viewed positively for stocks. However, Russia’s invasion in Ukraine placed more emphasis on shedding risks than the potential to get higher returns on Wall Street.

Investors are buying TIPS due to high inflation fears, as evidenced by the decline in U.S. benchmark real yields. They have been mostly below zero since 2019. The war has driven global benchmark futures up to just below $140 per barrel, a 14-year peak.

Even though U.S. stocks have a solid earnings outlook, and are backed by an economy that is strong, they may not prove to be the best assets during this current geopolitical crisis. Analysts agreed, but there were differences in opinions.

If all other things are equal, and you saw that one the most powerful countries in the globe is attacking a country that is one-third its own size and that it wants to rebuild the Russian Empire, would that be a great backdrop for stocks? David Petrosinelli (Managing Director and Senior Trader, broker-dealer InspereX) in New York.

Russian President Vladimir Putin did not condemn the invasion as a “special operations” and promised to continue his offensive. He said that unless Kyiv gave up, it would go according to plan.

After Russia’s invasion of Ukraine on February 24, yields on U.S. Treasury Inflation Protected Securities 10 year (TIPS) has dropped approximately 45 basis points. This is because inflation was not included in the calculation.

Since the February 10 release of U.S. Consumer Price Data showing that U.S. annual inflation in January hit a 40 year high, the 10-year TIPS yield fell by 64 basis points. The 10-year real yield fell to a 2-month low of 1.027% on Monday.

Real yields provide important information about broader financial conditions. If they are low that often underpins U.S. stocks.

Tim Wessel, macro strategist at Attainment, stated that Equities, just like all financial assets, are evaluated on the value of future cash flows. Deutsche Bank New York (DE:).

When real yields drop, it means that the stock’s cash flow for future years is expected to have a higher value. If you look at the sector breakdown of equities, if you look at the and compare its returns to big tech stocks or FANG stocks, they outperform the S&P on days when real yields fall,” he added, referring to the growth-stock grouping of Facebook (NASDAQ:), now known as Meta, Amazon (NASDAQ:), Netflix (NASDAQ:) and Google-parent Alphabet (NASDAQ:).

After a sharp fall to start the year accelerated with Russia-Ukraine tensions, the benchmark S&P 500 has bounced back about 4% from its Feb 24 intraday low. Wall Street’s fear gauge, The, has increased and the market opened lower on Monday.

The S&P 500 technology index did slip slightly last week, mainly due to selling on Thursday and Friday. This index has gained 4.2% in the past 24 hours since it reached its intraday trough of February 24, 2009.

Analysts believe that U.S. stocks have benefitted from the fact that, despite the fall in real yields and the recent geopolitical turmoil, the Federal Reserve would adopt a slow approach to increasing monetary policy. This will begin next week.

Fed Chair Jerome Powell indicated last week that he will support a first quarter percentage point rise in the Fed benchmark rate at their March 15-16 meeting. But, Powell also suggested the possibility of more aggressive hiking this year if inflation doesn’t ease.

Ryan Swift from BCA Research in Montreal said that uncertainty would cause the Fed not to act as quickly, to tighten slower, and thus fall behind the inflation curve.

Petrosinelli, InspereX’s economist thinks that the long-term risk of equities lies in the middle to the long term.

Petrosinelli explained that the expectations factor is what makes this a wild card. It’s possible to see crude oil as low as $150 per barrel here, and it is not likely. That can’t be good news for stocks.