Why do bond yields matter to ASX share investors and why is everyone suddenly talking about them?
What do rising bond yields mean?
Benchmark United States Government bond yields have been downward trending since late 2018. Yields have managed to plummet from as high as 3.25% in October 2018 to as low as 0.50% in late 2020.
Record low bond yields mean that investors are forced to seek out higher-risk investments to gain a meaningful return. This translates to a flow of funds from bond markets into higher risk assets such as equity markets. Lower borrowing rates also buoy the economy and encourage greater economic activity from businesses and consumers.
More recently, bond yields have surged from lows of 0.50% to 1.55% last night. Rising yields have a ripple effect across the economy and the stock market. Higher yields, or interest rates, translate to higher borrowing costs for individuals and businesses. As bond yields inch higher, this could also result in a flow of funds from share markets back into bond markets.
Furthermore, one of the dangers of record low, near-zero interest rates is that they can inflate asset prices. As bond yields have pushed higher, the sectors that benefitted the most from low yields, such as tech, have been hit the hardest. Meanwhile, cyclical industries and sectors that generate strong cash flows, such as financials, infrastructure and commodities, typically perform better under higher interest rate environments.
For example, the S&P/ASX 200 Info Tech Index (ASX: XIJ) slumped by more than 10% in February, despite the S&P/ASX 200 Index (ASX: XJO) closing 1% higher. In the last few weeks, the US tech-heavy Nasdaq Composite (NASDAQ: .IXIC) has consistently underperformed the S&P 500 Index (SP: .INX) and the Dow Jones Industrial Average Index (DJX: .DJI).
ASX 200 tech shares slammed
The most richly-valued sector, tech, is arguably the most vulnerable to rising bond yields. This can be evidenced by the sea of red across most tech and growth related shares today. Most notably, the Afterpay Ltd (ASX: APT) share price has slumped nearly 7% to a 3-month low around the $110 level. Meanwhile, other large cap tech shares such as Xero Limited (ASX: XRO), WiseTech Global Ltd (ASX: WTC) and NextDC Ltd (ASX: NXT) have also ground lower.