Although risky assets show more resilience than instruments that carry high duration, we expect things to change as real rates break resistance at -0.5% and rise quickly to -0.35%. Indeed, by that time, 30-year TIPS yields would have already turned positive, indicating that financing conditions are tightening fast, threatening risky assets.
So far, duration has been a bigger villain than credit quality. Year to date, US Treasuries with 20+years maturity (TLT) have fallen -4.2%, investment grade USD bonds (LQD) dropped -3.4%, and emerging market hard currency bonds (EMB) -3.7%. At the same time, junk bonds that carry much shorter durations have proven more resilient, with junk in the US (HYG) falling -1.8% and Europe (IHYG) only -1.1%.
However, next week's FOMC meeting could support real rates if the Fed doesn't sound as hawkish as the market expects. So far, the market is pricing four interest rate hikes, with some market players expecting two rate hikes in the March meeting. Any indication of fewer hikes might produce a drop in nominal yields and a rise in breakeven rates, translating into lower real rates.