Bond-Yield Surge Challenges Investor Confidence in Big Tech Companies

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Treasury yields are climbing at their fastest pace in months, testing investor confidence in popular stocks like Microsoft, Google parent Alphabet and Nvidia

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The recent reversal comes with long-term Treasury yields rising at their fastest pace in months, pushing the yield on the benchmark 10-year US Treasury note above 1.5%. Yields rise through declining bond prices and everything from mortgage rates to auto loans. The 10-year yield is at a three-month high, reducing the attractiveness of some tech companies.

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The low return makes many investors willing to pay more for shares of big tech companies than they expect to churn out profits in the future. Yields rise when investors feel better about the economy, so their advances boost stocks of companies that make more money and increase shareholder returns during periods of global growth. So-called cyclical stocks are also cheap.

Investors pulled out $1.2 billion from tech mutual and exchange-traded funds during the week ended September 22, according to data from data provider EPFR Global show, the first such outflow in nearly three months. The nearly $29 billion outflow from US stock funds that week was the largest in three-and-a-half years, halting continued inflows.

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While yields and similar moves in tech stocks in recent months have proved temporary, the latest volatility is with many investors about the prospect of rising interest rates. Recent bets on improving economic data and climbing inflation come after the Federal Reserve indicated it could resume bond buying back in November and raise rates in 2022. Some analysts say changes in the economy due to the coronavirus and supply-chain disruptions could further boost inflation. and interest rates.

The latest climb in yields raised the stakes that they would remain low and that market prices of tech leaders would continue to swell. Investors favored financially sensitive stocks as bond yields rose early in the year, then poured tens of billions of dollars into tech funds this summer as the so-called reopening trade faded. Analysts said the recent crowdfunding in tech stocks is now being forced to re-evaluate those bets.

“A lot of them don’t want to step back from their positions,” said Sean Snyder, head of investment strategy at Citi US Consumer Wealth Management. For tech stocks, he said, “valuations remain high and they are at risk when yields take these sharp jumps.” He recommends customers favor cheaper sectors like healthcare, but still expects tech companies to continue to grow.

Many investors were already ready to take back this fall after a month’s rally in stocks. According to Dow Jones market data, the S&P 500 hasn’t traded 5% below its all-time high in nearly a year, the longest streak since February 2018.

The market’s recent comeback comes with investors worried about the imminent collapse of Chinese property developer China Evergrande Group and an imminent deadline for the US government to reach a deal to raise the federal borrowing limit, or debt limit.

Sharp changes like those seen recently are a concern for market watchers as the downside momentum could feed itself, making the sell-off more severe. Many technology stocks have benefited from the explosion of options trading, which allows the holder to buy or sell an asset at a specific price in the future. Market makers who sell options to investors often hedge their positions by buying the underlying shares, a force that can increase share-price gains.

But when the stock falls, the same trends can strengthen the sell-off. Increased volatility and outflows from stock funds can also trigger selling by trend-following investors. Traders often use borrowed money to juice returns. When stocks and bonds fall together as they have been, liquidating those trades can prompt others to exit their positions as well.

Such systematic selling signals are worrying for investors as they can punish strong companies as much as weak ones.

“Everything gets thrown out, so we’re seeing some degradation in technology across the board,” said Leslie Thompson, managing member of Spectrum Management Group. She continues to favor big tech companies like Microsoft and Alphabet and said holding stocks are some attractive options despite the recent rise in bond yields.

Because trillion-dollar companies such as Microsoft, Alphabet, Apple and Amazon make up a large portion of the major indexes, a large drop in those stocks can have a big impact on the stock market. Even though energy stocks are up 3.9% this week and financial stocks are nearly flat, the S&P 500 is down 2.3%.

Investors say that while many investors are confident that strong earnings will support stocks, more sudden rate movements could add to the ongoing volatility. This is especially the case with the delta version of the coronavirus that has scoured recent economic data.

“There’s a lot of caution about where things go from here,” said Mr. Snyder of Citi US Consumer Wealth Management.

Amrit Ramkumar at [email protected]

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