Rising bond yields rattle the financial system, sending tech stocks down
The yield on the US ten-year Treasury has risen from 0.9% at the start of the year to almost 1.6% this week, making stocks – especially expensive tech stocks – less appealing and driving down stockmarkets.
![Singapore Apple store](https://cdn.mos.cms.futurecdn.net/hoJni6Dxd7W7QspVhXhf73-415-80.jpg)
“The recession is effectively over” in America, says Michael Wilson of Morgan Stanley. Progress on vaccinations combined with another huge round of fiscal stimulus means “it’s hard not to imagine an economy... on fire later this year”.
Get ready for the Biden boom
By the middle of the week the US Congress was in the final stages of approving a $1.9trn (£1.4trn) Covid-19 relief bill. The package includes another round of $1,400 stimulus cheques to be distributed to US households and extends unemployment support measures. The bill also includes $350bn for state and local governments and targeted support for small businesses, hospitality and airlines.
There isn’t much economic pain left for the relief bill to relieve, says Irwin Stelzer in The Sunday Times. The economy created 379,000 jobs last month. Measures of service-sector and manufacturing activity have roared back since the start of the year. Yet with unemployment still at 6.2%, policymakers say the recovery still needs plenty of support. The result will be an economic “boom that will be heard…around the world”.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
![https://cdn.mos.cms.futurecdn.net/flexiimages/mw70aro6gl1676370748.jpg](https://cdn.mos.cms.futurecdn.net/flexiimages/mw70aro6gl1676370748-320-80.jpg)
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Stockmarkets are not joining in the fun. The S&P 500 was flat over the past month, while the technology-heavy Nasdaq Composite index has officially entered a correction (defined as a 10% fall from a recent peak), reports Julia Horowitz for CNN. Shares in tech giants have taken the worst hit, with Apple shares 18% off a January high and Amazon down by 12% in six weeks. As tech giants have lagged, cyclical shares have done better. The FTSE 100, skewed towards energy and banks, has gained 3% over the past month.
The cause of the rotation
As John Authers on Bloomberg explains, the “underlying driver” of this “rotation” is the bond market. The yield on the US ten-year Treasury has risen from 0.9% at the start of the year to almost 1.6% this week as investors prepare for economic recovery.
The pricey tech shares that flourished during the pandemic are now being marked down, while higher bond yields make stocks less appealing generally. Bond yields move inversely to prices, so rising yields also mean losses for bondholders. “Broad baskets of US and global government debt have declined more than 3% since the start of January”, says Michael Mackenzie in the Financial Times. That is a big deal in the staid world of bond investing: “The main US Treasury index” hasn’t lost money since 2013. The real “puzzle” is not why bond yields are rising but why they “stayed so low for so long”, says Roger Bootle in The Daily Telegraph. The UK ten-year gilt yield has fallen from 15% in 1981 to 0.7% today. It’s been a long time since bond markets were able, as Bill Clinton’s adviser James Carville once quipped, to “intimidate everybody”. In recent years “bond markets were not intimidating anybody” thanks to quantitative easing: central banks were buying up bonds with printed cash, while “investors fell over themselves to lend to governments – sometimes even at negative rates”. Yet if yields keep ticking up then there could be “many a sleepless night”.
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
-
What does a weak yen mean for Japanese stocks?
The Japanese yen has hit its lowest level against the US Dollar since 1986. What does it mean for its stock market?
By Alex Rankine Published
-
Nationwide cuts mortgage rates as they dip below 4% for first time since February
The building society’s cheapest deal is now priced at 3.99%. Whether you’re buying or remortgaging, we look at whether rates could drop further in the coming months
By Ruth Emery Published
-
What does a weak yen mean for Japanese stocks?
The Japanese yen has hit its lowest level against the US Dollar since 1986. What does it mean for its stock market?
By Alex Rankine Published
-
UK mid-caps: an improving outlook
UK mid-caps have perked up and the rally may run further, but long-term investors should remain selective
By Cris Sholto Heaton Published
-
The tobacco industry is going smoke-free - how to profit from it
Tobacco companies have realised their traditional products are on the wane. But new opportunities have opened up – and should prove lucrative
By Rupert Hargreaves Published
-
Is it time to invest in creative industries?
Any industrial strategy should not overlook the creative industries, one of our top national assets
By David C. Stevenson Published
-
Is Mercia Asset Management set for success?
Mercia Asset Management helps the government fund smaller companies in Britain’s regions. Should you invest?
By Rupert Hargreaves Published
-
British stocks set for a boost
British stocks are due for a bounce as the UK looks more stable compared to many economies
By Alex Rankine Published
-
Ocado shares jump by a fifth
Ocado takes a turn for the better after attractive profit forecasts were announced
By Dr Matthew Partridge Published
-
The AI boom is on borrowed time
The hype around the AI boom could be on its way out – but why?
By Alex Rankine Published