Rising treasury yields brings back memories of early 2021
Just when you thought things couldn’t get any worse, investors were hit with another surprise — rising Treasury yields sharply sent the entire market lower.
What’s the big deal? The 10-year Treasury yield — the interest rate on government loans — is a widely used indicator of investor confidence in the economy.
- While rising rates indicate a recovering economy, it could also be bad for stocks of certain sectors.
- High growth companies especially tech — whose valuations depend on future earnings — are the most sensitive to rising interest rates.
Tech-heavy Nasdaq index fell 2.7% — the most compared to other indexes.
Not this again: In February, rising rates sparked the sell-off in growth stocks as rates soared to 1.75% but slowly fell back to 1.10% by August. Yesterday’s actions gave investors some PTSD:
- Speculative stocks fell the most with many losing more than half their value.
- This time, prices are already much lower for many speculative companies than they were at the start of 2021.
With valuations lower, the impact on stocks may not be as traumatic as they were earlier this year.
But that depends on its direction. If the Treasury yield reaches 3%, bonds could become more attractive which could lead to more money flowing out of stocks.
Reopening time: The stock market is indicating that we’re entering another reopening cycle according to Jim Paulsen, Leuthold Group’s chief investment strategist.
Investors are repositioning their portfolio to benefit from the reopening after delays from the Delta variant:
- Rising yields are expected to benefit the financial and energy sectors over growth sectors according to Mark Haefele of UBS Global Wealth Management.
- SVB Financial and Bank of America are two companies that are highly correlated with rates, according to Craig Johnson of Piper Sandler.