Rising bond yields rattle the financial system, sending tech stocks down

“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”.

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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”.