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.

“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”. 

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”.

Recommended

Passive investors beware: you may be dangerously overexposed to big tech stocks
Stockmarkets

Passive investors beware: you may be dangerously overexposed to big tech stocks

Most investors in index funds are likely to be dangerously over-invested in US stocks, and particularly in a few huge tech stocks. It’s time to think …
15 Feb 2021
US stockmarkets shrug off signs of overheating
US stockmarkets

US stockmarkets shrug off signs of overheating

Signs of overheating in the markets are everywhere, but that didn't stop US stocks hitting new record highs last week.
29 Jan 2021
US stockmarkets shrug off the mob's rampage through the US Capitol building
US stockmarkets

US stockmarkets shrug off the mob's rampage through the US Capitol building

US stockmarkets seem more interested in the results of Senate elections in Georgia than on the lawless mob's raid on the country's Capitol building.
14 Jan 2021
Arm Holdings takeover: has Nvidia had its chips?
Tech stocks

Arm Holdings takeover: has Nvidia had its chips?

The takeover of Britain’s semiconductor group Arm Holdings by its US rival Nvidia could be running into the sand, says Matthew Partridge.
22 Apr 2021

Most Popular

China owns a lot more gold than it’s letting on – and here’s why
Gold

China owns a lot more gold than it’s letting on – and here’s why

In a world awash with money-printing, a currency backed by gold would have great credibility. And China – with designs on the yuan becoming the world’…
21 Apr 2021
“Joke” cryptocurrency dogecoin goes to the moon. What’s going on?
Bitcoin

“Joke” cryptocurrency dogecoin goes to the moon. What’s going on?

Dogecoin – a cryptocurrency created as a joke – has risen by more than 9,000% this year alone. Saloni Sardana looks at how something that began as an …
19 Apr 2021
House prices in the UK are still surging – here’s why it’ll probably continue
Property

House prices in the UK are still surging – here’s why it’ll probably continue

The latest UK house price data shows no letup in the country’s booming property market, with the biggest yearly rise since 2014. And there’s no end in…
22 Apr 2021