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.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. Kerry Sun has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of and recommends Alphabet (A shares), Amazon, Apple, and Facebook and recommends the following options: long January 2022 $1920 calls on Amazon and short January 2022 $1940 calls on Amazon. The Motley Fool Australia owns shares of AFTERPAY T FPO, WiseTech Global, and Xero. The Motley Fool Australia has recommended Alphabet (A shares), Amazon, Apple, and Facebook. 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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