Sujata Rao gives a glimpse at what lies ahead.

The 10-year Treasury yields rose a quarter-point since January as markets attempt to value a U.S. increase in interest rates. The interesting thing is that the U.S. inflation-adjusted yields, or “real”, are driving these moves by 33 basis points.

Although real yields have been at an all-time high since June 2013, they are likely to remain very low for quite some time. But their rise poses challenges for assets that benefited from the there-is-no-alternative reasoning. This week has seen stocks fall, with bitcoin falling 8% while Nasdaq tech fell 4.5%. Graphic: Real yields, https://fingfx.thomsonreuters.com/gfx/mkt/egvbkjowdpq/Pasted%20image%201641767281191.png

The holders of bonds with a longer duration are likely to be nervous, as these assets experienced large outflows over the last four weeks. Goldman Sachs (NYSE) notes.

Inflation isn’t slowing down. Euro area prices increased 5% in December, and the U.S. CPI reading on Wednesday is likely to be higher at 7% or more. However, the ECB has remained resolutely dovish — Isabel Schnabel, a member of the board, did mention that on Sunday the bank could need to move if rising energy prices continue. On Monday, the euro was 0.3% less.

Stocks are trying their best to recover — U.S., European and Asian equity futures are increasing even though nominal Treasury yields might be a little higher.

What happens to stocks when real yields keep rising? There were many episodes when stocks rose with real yields. The most recent was the period between March 2020 and February 2021, when an increase of 1.5 percent in real yield was coupled by a global return of 50%.

Berenberg advised his clients recently to remain put. However, rate sensitive tech is more prevalent than ever before. This could change the equation.

Last but not least, we mustn’t forget geopolitics, which are both threatening to increase inflation and slow down economic growth. The 5% increase in oil prices last week is being extended and the U.S.-Russia negotiations are expected to begin later in today with very few expectations.

These are the key developments which should give more direction to markets Monday.

German Finance Minister Christian Lindner and Paschal Dohoe (Eurogroup President) hold a press conference

Jens Stoltenberg (NATO chief) meets with Ukraine’s Foreign Minister

Kazakh President steps up the purge on security agency

No concessions or breakthroughs: Russia and the U.S. poke fun at Ukraine negotiations

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