Surging bond yields deflate technology valuations

Vrasidas Neofytou
Head of Investment Research

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The tech-heavy Nasdaq Composite lost as much as 10% during the first trading days of 2022 as the tightening of financial conditions and the rising bond yields deflated technology valuations.

The yield on the 10-year Treasury note climbed to 1,80% its highest level since January 2020, influenced by concerns that the policymakers may raise rates more aggressively than previously expected to curb heated inflation.

Federal Reserve, the world’s most important central bank had already signalled it would start raising interest rates, taper bond-purchasing programs, and reduce holdings of Treasuries and mortgage-backed securities.

The hawkish comments from policymakers triggered a sell-off in global stock markets which escalated even to growth companies.

Since the possibility of higher rates reduced the value that investors see in the future cash flow of technology companies.

Investors dumped shares of high valued tech companies and piled into sectors of energy, financial, and industrial markets that could profit from a rise in interest rates, and economic recovery.

The zero interest rates helped fuel a huge rally in growth sectors such as technologies and cryptocurrencies, making bonds and value stocks less attractive for investors.

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