US real yields surge to 2009 highs, recalling post-Lehman carnage

• Inflation-adjusted bond yields in the US have surged to the highest levels since the 2008-2009 financial crisis.
• "Real yields break things up here, at 185bps, the highest since Lehman," Larry McDonald said on X. 
• Rising real yields underscore increasing costs for US borrowers, and also add to the investment appeal of bonds versus stocks. 

Inflation-adjusted bond yields in the US have surged to their highest level since the financial carnage that followed the collapse of Lehman Brothers about 15 years ago, markets guru Larry McDonald pointed out. 

"Real yields break things up here, at 185bps, the highest since Lehman," the "Bear Traps Report" founder said in a Tuesday post on X. 

Real yields represent the interest-rate returns on a government bond minus the prevailing inflation rate. They are a big-picture indicator of how expensive borrowings are in an economy. Also, rising real yields tend to add to the appeal of bonds as an investment option, which can be negative for stocks on a relative basis.

The yield on 10-year inflation-protected Treasuries, also known as TIPS, surged to 1.89% on Wednesday, marking the highest level since mid-2009. The rate has surged by more than 300 basis points since late 2021.

The jump comes as investors anticipate the Federal Reserve will keep interest rates high for longer in a bid to bring inflation down to its 2% target, from 3.2% in July.

The central bank has already hiked benchmark rates by more than 500 basis points since early 2022 - from near-zero levels to upward of 5% - marking a historically rapid monetary-tightening cycle. 

Its efforts proved fruitful until July's inflation report which showed consumer price pressures ticked up after months of declines, pushing the case for further rate increases.  

Aside from gauging the outlook for US interest rates, market experts have also used bond market indicators to determine the health of the economy. Market veteran Ed Yardeni warned the US economy could be in for pain, thanks to the inverted yield spread between the 2-year and 10-year Treasury notes.