Why February was a shocker for ASX 200 tech shares

February saw ASX 200 tech shares sink lower, with heavyweights such as Afterpay Ltd (ASX: APT) sinking 12% last month

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February just didn’t seem fair for ASX 200 tech share investors. The S&P/ASX 200 Info Tech (ASX: XIJ) index slumped by more than 10% despite the ASX 200 closing 1% higher in February. 

It wasn’t just ASX 200 tech shares struggling in February 

It wasn’t just ASX 200 tech shares that found February to be a challenging month. A similar narrative played out in the US, where the tech-heavy Nasdaq Composite (INDEXNASDAQ: .IXIC) found itself up more than 8% by mid-February before giving up all its gains to finish the month just 1% higher.  

What’s driving the weakness in tech? 

Long-term US interest rates, otherwise known as bond yields, have surged in recent months to briefly touch 1.60%.  

When COVID-19 rattled the markets back in March 2020, bond yields took a plunge to as low as 0.50%. Low yields typically spell good news for equity markets as investors have to consider buying higher-risk investments such as shares to get a better return. 

Yields have since pushed steadily higher since October, to close at 1.46% last Friday.

Higher yields signal higher borrowing costs and inflation, which negatively impact businesses and drag on equity market performance. 

What about other sectors?

Value sectors that typically generate high cash flow with moderate valuations typically do well in higher interest rate environments. This was evidenced by the strong performance from sectors such as the S&P/ASX Energy (ASX: XEJ), S&P/ASX Materials (ASX: XMJ) and S&P/ASX Financials (ASX: XFJ) that finished the month a respective 2%, 7% and 4.5% higher. 

ASX 200 tech shares giving up gains 

The weakness in the tech sector towards the second half of February saw many ASX 200 tech shares giving up gains.

Tech heavyweights such as Afterpay Ltd (ASX: APT) hit a record all-time high of $160.05 mid-February before diving 25% lower to close at $119.50. Xero Ltd (ASX: XRO), on the other hand, spent most of February in the red and down 8% for the month. Its shares are now almost 30% below their record highs set in December. 

March has so far seen ASX 200 tech shares sliding sideways, with the Info Tech index down 0.48% at the time of writing. 

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Motley Fool contributor Kerry Sun has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of AFTERPAY T FPO and Xero. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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