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- US bond yields have jumped as investors price in stronger growth and inflation.
- Stronger returns in the bond market have weighed on stocks, with the Nasdaq down for the week.
- Goldman analysts said they expect stocks to keep rising after this bout of “indigestion.”
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US government bonds were on track for their worst monthly rout since Donald Trump was elected in November 2016 on Friday, sending shockwaves through stock markets that have become accustomed to ultra-low yields.
The yield on the benchmark 10-year Treasury note had risen around 41 basis points (0.41 percentage points) as of Friday after investors dumped bonds at the fastest rate in years. Bond yields rise as prices fall.
It was the biggest monthly jump in borrowing costs since November 2016, when Donald Trump’s shock victory in the presidential election rattled investors.
The rise has sparked a nervous bout of selling in the stock markets. Shares soared in 2020 thanks in large part to record-low bond yields and hugely supportive monetary policy from central banks.
Bond yields have jumped this month because investors expect strong growth in 2021 and rising inflation thanks to huge amounts of stimulus and the rollout of coronavirus vaccines.
The key 10-year yield broke above 1.5%, a level not seen since before the coronavirus pandemic, on Thursday. It was down 5 basis points to 1.475% at 8 a.m. ET on Friday.
Investors have demanded higher returns on bonds to account for inflation, which would erode their returns.
But some also think stronger growth and inflation will cause the US Federal Reserve - which has been holding down yields - to cut back its support for the economy sooner than previously expected.
The rise has unnerved stock-market investors, weighing in particular on fast-growing stocks that looked very attractive when returns on bonds were low. The tech-heavy Nasdaq slumped 3.52% on Thursday as the S&P 500 sank 2.45%.
"Stocks in the tech sector are valued on longer-term earnings," said James McDonald, CEO of Hercules Investments. "If bond yields and borrowing costs are rising, a company's longer-term earnings may be negatively affected."
Bond yields around the world have also spiked in February. The UK 10-year Gilt yield was up around 50 basis points for the month on Friday to 0.825%.
Yet Karen Ward, chief market strategist for Europe at JP Morgan Asset Management, said: "So long as confidence in the economic recovery and earnings expectation continue to rise, then global stock markets should be able to absorb higher bond yields."
Analysts at Goldman Sachs said in a note that the speed of the rise in yields has been the key problems for stocks, leading to "indigestion" among investors as they take account of the new environment.
Goldman analysts Kamakshya Trivedi, Zach Pandl, and Dominic Wilson said they expect the recent rise in stocks to "broadly continue."
Yet they said "expect the back and forth between periods of [bond yield] pressure and equity recovery to be a persistent part of the landscape in the coming months and an ongoing challenge for tactical risk-taking."