- In late February, the yield on ten-year US government debt rose sharply.
- The market expected more stimulus, a rapid recovery and, with them, more inflation.
- Tech stocks suffered: when rates rise, what depends on future earnings is worth less today.
In late February 2021, the yield on ten-year US government debt rose sharply. It was one of those moves that go unnoticed outside financial markets, yet condition many things at once: share prices, the cost of credit and expectations about what central banks will do. The trigger was the expectation of more stimulus and a rapid recovery, and technology companies were among those who felt it most. What happens in US government debt rarely stays there: it is transmitted to other markets and other currencies.
The market was beginning to price in an environment different from that of the previous months. After a year of very low rates and health uncertainty, investors were starting to think about a recovering economy and about inflation that was ceasing to be a minor issue. For those who do not follow the markets daily, the signal is useful: when long-term rates move, they end up affecting mortgages, business loans and valuations.
What moved
The yield, or rate, of a bond is what the buyer earns. It has an inverse relationship with its price: when the bond’s price falls, the yield rises, and vice versa. In late February that move took place in ten-year US debt, a benchmark followed around the world because it serves as a basis for valuing other assets and for setting the cost of many loans.
Behind the rise was the expectation of more stimulus and a rapid recovery and, with them, more inflation. If investors believe prices will rise, they demand a higher yield to lend over the long term, because the money they receive in the future will buy less. It is the way the market turns its expectations into numbers, and that is why these moves are read as a preview of what is expected from the economy. That is why analysts follow the ten-year yield closely as a kind of thermometer of market mood.
Why tech stocks suffered
When long-term rates rise, the valuation of everything that depends on future cash flows changes: growth stocks, property and the debt itself. A profit that will arrive many years from now is worth less today if money earns more. That is why technology companies, whose valuation rests on what they are expected to earn in the future, were among the hardest hit.
It is a basic mechanism of finance: the higher the rate, the lower the present value. It is calculated by discounting future income at a rate that depends on what risk-free money yields, so any change in that rate alters the result. It does not mean the companies have got worse, but that the bar they must clear to justify their price has risen. The same reasoning applies to any asset whose value depends on income that will arrive in the future, such as a property that will be let for decades.
A signal worth heeding
It is a signal worth heeding. Long-term rates influence the cost of mortgages, business loans and project financing. When they rise, credit becomes more expensive, and those with variable-rate debt or who need to refinance in the coming months notice it first. Savers, on the other hand, may see the return on certain instruments improve.
Reviewing how each portfolio is financed and what would happen with higher rates is a sensible exercise before the change of environment reaches the accounts. It is worth going over upcoming maturities, the share of fixed and variable-rate debt and the cash buffer, and discussing it with the bank or a financial adviser.
To anticipate is not to guess, it is to prepare.
This article is general information. It is not legal, tax or investment advice, and it does not take anyone’s particular circumstances into account.
