In a potentially ominous sign for stocks and other risk assets, analysts say the surge in U.S. government bond yields last week was mostly driven by a jump in the so-called real rate, or the inflation-adjusted yield.

Central bankers and market participants closely watch real yields as they indicate how much the Federal Reserve’s interest-rate increases have tightened financial conditions.

Though real yields tend to climb during periods of growing economic optimism, investors say their rapid rise can indicate when rates become unmoored from growth expectations, threatening businesses accustomed to comparatively cheap credit. With the 10-year real yield breaking above its five year trading range, that could spell trouble for equities, though it isn’t clear exactly where the pain threshold lies.

“In a credit/debt dependent US economy, and global economy for that matter, there is no greater input than the cost of money. I have no idea when the next economic downturn comes but I’m very confident that when it does it will be triggered by a rise in rates that at some point hurts,” wrote Peter Boockvar, chief market analyst at the Bleakley Advisory Group.

Derived from Treasury inflation-protected securities, or TIPS, the 10-year real yield jumped on Friday to 1.059%, up nearly 30 basis points from where it started in September. Its ascent helped boost the 10-year note yield to a seven-year intraday peak at 3.261% on Tuesday, according to Tradeweb data. The bond market was closed on Monday in observance of Columbus Day.

Meanwhile, stocks have struggled, with the S&P 500 down around 1% and the Nasdaq Composite Index down more than 3.9% this month.

Unnerved investors may feel valuations for U.S. stocks have become stretched after the 10-year real yield pushed above its five-year trading range between 1% and 0%, said analysts at Morgan Stanley, in a Friday research note.

“Low rates have underpinned equity multiples at high levels and a further rise in rates would push equity premiums from average to rich in the U.S,” they said.

Beyond fears of higher borrowing costs, one concern is the rise in real yields could accelerate the dollar’s advance as investors reallocate their portfolios in favor of richer-yielding U.S assets. After three rate increases this year, the ICE U.S. Dollar Index is up more than 4% year-to-date.

Moreover, large-capitalization firms with entrenched international operations could see their overseas earnings take a hit from the stronger greenback. And emerging-market firms and governments, who hold large dollar-denominated debts, could struggle under the higher cost of borrowing and servicing dollar debts in local currencies.

Real yields came in focus in February when their rise coincided weakness in the stock market. The Dow Jones Industrial Average and S&P 500 briefly slumped into correction territory after their mostly uninterrupted ascent in 2017, but eventually regained their footing to hit new records.

Back then, bearish analysts pointed to how a deterioration of data relative to analysts’ expectations meant growth was no longer keeping pace with borrowing costs.

But other investors say the current economic backdrop is more robust. The U.S. Citi Economic Surprise Index turned positive last week for the first time since August, meaning data releases were starting exceed economists’ forecasts again, FactSet data shows. After all, the recent bond market selloff was partly triggered by the second highest reading of the Institute of Supply Management’s services gauge in September.

And some doubt the current growth regime will generate the kind of inflationary pressures needed to force the Fed to ramp up the pace of rate increases. Inflation expectations haven't climbed materially since last week even after an 0.3% gain in the average hourly earnings number from September’s jobs report.

The 10-year break-even inflation rate, or where bond investors anticipate consumer prices will be over the next decade, has struggled to push above a 2.2% ceiling.

“This is the market saying the economy is strong enough but doesn’t look like its overheating as the Fed continues to get rates up to the neutral rate,” said Matt Toms, chief investment officer of fixed income at Voya Investment Management.

Yet even if the pace of rate increases remains unchanged, investors have fled from the bond market over fears the Fed may terminate its rate-increase cycle at a level higher than previously thought. Atlanta Fed President Raphael Bostic said given the robustness of recent economic data, the central bank may need to rethink their estimates of the neutral rate, the level of monetary policy at which rates neither stimulate nor retards growth and inflation.

“The market could be pricing a higher neutral rate for the Fed or even a return to the precrisis regime,” wrote Bilal Hafeez, global head of G-10 FX strategy, at Nomura.

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