Rising Treasury bond yields around the world fueled a sell-off on Wall Street this week, as investors re-think valuations.
In early Tuesday morning trade, the benchmark 10-year Treasury bond yielded slightly above 1.52%, up from 1.22% early in September. Across Europe, the 10-year German Treasury bond yield continues to be trading with negative yields, but they have risen from -0.45% to -0.2% over the said period. In Japan, the 10-year Treasury bond yields continue to trade with near-zero yields, but they have edged higher over the said period, to 0.07%.
What’s driving bond yields higher? A couple of things.
First is tapering, the prospect that central banks roll back their Treasury bond-buying program to fight the rising of inflation.
The Eurozone has already slowed down its bond-buying program as inflation hovers at a three-year high. Last week, the Federal Reserve announced that it would begin tapering soon, though it didn’t give a specific date.
In a Congressional testimony held Tuesday, Federal Reserve chair, Jerome H. Powell, raised concerns that inflation may be around longer than he thought, and that tapering would be completed by the middle of 2022. That means that there will be more bonds floating around, pushing yields higher.
Second, there is growing anxiety over the prospect of the U.S. Congress not reaching an agreement to lift the debt limit, and the U.S. Treasury Department not fulfilling its debt obligations.
Third, rising energy prices have raised fears that inflation will spin out of control, and force the Federal Reserve to raise short-term interest rates in addition to tempering.
Rising bond yields reduce future equity valuations, as these yields are used as discounting factors for future earnings in equity valuation models.
Thus, the sell-off across the board, especially in the high-tech sector, which had a big run-up in the last 18 months, and valuations are overextended. In late morning trade, the tech-heavy Nasdaq was down 400 points, close to 2.8%, while the S&P 500 and Dow Jones were down close to 2%.
Compounding the problem, a couple of analyst downgrades on the semiconductor sector added to Nasdaq’s sell-off.
The bottom line: The long period of ultra-low interest rates may be coming to an end soon, prompting investors to re-evaluate their portfolios.
Disclosure: At the time of publication, Panos Mourdoukoutas had no positions in the stocks mentioned.
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