The rise in U.S. long-dated bond yield has forced global investors to pay attention to the threat of rising real interest rates and sounded the alarm on risky assets. Recently favored by investors to follow the investment underlying out of favor, tesla (TSLA-US) 10 trading days cumulative decline of more than 10%, and dragged the “female stock goddess” management of the Ark Innovation ETF.
Investors look forward to the Biden administration’s fiscal stimulus will drive the economic recovery, coupled with the Federal Reserve Board (Fed) vow to continue to support the economy, Wednesday (17) economic data show that January retail sales, industrial production and producer price index (PPI) are higher than market forecasts.
In anticipation of rising Inflation, the U.S. 10-year bond rose 1.33%, approaching a one-year high, jumping a total of 23 basis points so far in February, this month’s rise is the only one seen so far in 2018. 10-year equilibrium inflation rate (10-year U.S. debt and anti-inflation debt spread) has recently hovered at 2.22%, a sharp rebound from last year’s trough of 0.47%.
While rising real interest rates represent an accelerating economic recovery, the recent acceleration in this uptrend means that borrowing rates will also climb rapidly, and will lead to a weakening of the appeal of other assets that benefit from negative real interest rates, such as stocks.
Mark Holman, chief executive of TwentyFour Asset Management, said: “Rising real interest rates represent a healthy situation as the real economy is recovering. But I worry that if they rise too quickly, all asset classes will be in trouble. The worrying thing is the change in the rate of rise.”
Favored stocks such as Tesla lose traction
Favored stocks in the market have recently lost some of their aura, for example, Tesla has fallen more than 10% in the past 10 trading days and dragged down the “Ark Innovation ETF” (ARKK), which is heavily bet on the stock, and Etsy (ETSY-US), a popular e-commerce stock that surged more than three times last year, has fallen more than 5% in two days.
Not only that, Goldman Sachs tracking the high-priced soft stock index on Wednesday fell 2%; the past two months outstanding performance of growth stocks out of favor, value stocks again prevailed.
Growth stocks are attracting investors to buy at a premium because they maintain expansion during periods of low interest rates, so when interest rates rise, the advantages of growth stocks decline.
While inflationary themes may have helped the rotation of the class, growth stocks lagging value stocks in periods of rising interest rates is not a foregone conclusion that applies as a whole.
Analysts including David Kostin have pointed out that the performance of large technology companies (Big Tech) is different from that of high growth stocks like Tesla or Etsy, with four of the top five technology companies “FAAMG Four of the “FAAMG” – Facebook, Apple, Amazon, Microsoft – the past year’s compensation rate, 70% of the company’s own growth-driven, not related to the stock price.
Kostin and other analysts said, “FAAMG benefited from the low interest rate environment not only because their high growth cash flow appeared more valuable, but their business model also remained attractive in the recession.”
In addition, it is worth noting that even as long bond rates climb, 10-year anti-inflationary bonds (TIPS) reflect U.S. real interest rates that are still far enough behind to set off alarm bells: both the 5-year and 10-year TIPS rates are below zero at -1.87% and -0.95%, respectively.
Kathy Jonas, chief strategist at Carlson Fixed Income, said the climb in real interest rates reflects an improving economy and represents competition for dividend-paying stocks and REITs, which are favored in a low interest rate environment.
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