In the past month, U.S. Treasury yields have risen sharply -- the benchmark 10-year rate climbed last Friday to the highest since the Covid-19 pandemic took hold, while the 30-year yield touched its loftiest level since 2019.
For years, yields have been ultralow for Treasurys, meaning investors earned very little interest in owning them. That in turn made stocks and other investments more attractive, driving up their prices. But when Treasury yields increase, so does the downward pressure on prices for other investments.
Here's a look at why the recent moves have been so rocky.
What is the interest rate?
The interest rate that impacts the stock market is the federal funds rate, the rate depository institutions are charged for borrowing money from Federal Reserve banks.
Essentially, the fed funds rate is a tool Fed uses to control inflation. Low-interest rates tend to result in more inflation, while high-interest rates tend to lower inflation.
How do rates affect the stock market?
Although the relationship between interest rates and the stock market is fairly indirect, the two tend to move in opposite directions—as a general rule of thumb, when the Federal Reserve cuts interest rates, it causes the stock market to go up; when the Federal Reserve raises interest rates, it causes the stock market to go down.
But there is no guarantee to how the market will react to any given interest rate change.
Why did rising treasury yields lead to tech sell-off?
The recent rise in yields is causing investors to pare back how much they're willing to spend on each $1 of future company earnings.
Stocks with the highest prices relative to earnings (P/E ratio) are in a place to get hit hard, as are stocks that have been bid up for their expected profits far in the future.
Big Tech stocks are in both those camps. Dividend-paying stocks also get hurt because investors looking for income can now turn instead to bonds, which are safer investments.
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Source: Los Angeles Times, moomoo news