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Rise in bond yields calls into question investor confidence in large technology companies

30 September 2021
2474
2 min.
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Rise in bond yields calls into question investor confidence in large technology companies

Stocks of companies at a time of rising bond yields

Shares in General Electric, Caterpillar and Boeing as well as financial and energy companies would be the best bet as US Treasury yields return to annual highs.

This week the US stock market reacted to the sharp rise in 10-year Treasury yields by falling tech stocks and "growth stocks".

In addition, market experts predict a further rise in bond yields to 1.7% and 1.75% (2021 highs) and this has investors searching for alternatives. Not every sector faces headwinds Wall Street analysts recommend betting on the growth of financial stocks, energy companies and large industrial sector stocks.

The Nasdaq Composite index of technology stocks, for example, is down 3.56% this week significantly stronger than the S&P 500 (-2.16%) or Dow Jones (-1.17%).

Financial sector stocks of the S&P 500 (SPF) have the most to gain, as they are most correlated with long-term bond yields. JPMorgan Chase (JPM), Bank of America (BAC) and Citigroup (C) are up 1.78%, 2.2% and 0.5% respectively over the past week.

Banks make up the bulk of the S&P 500 financial sector and the growing gap between long-term yields and short-term interest rates is increasing the profitability that banks can lend at higher interest rates as well as lend at lower interest rates. In addition, banks can lend more if economic growth is expected to be sufficient. Also, if economic growth is expected to be strong enough, banks can lend more. According to Wolfe Research, since 2010 S&P 500 FINANCIALS have had a 66% correlation with 10-year Treasury bond yields, the highest correlation of any sector in the index. While the Financial Select Sector SPDR exchange-traded fund (XLF) has already climbed to around its 2021 high, the SPDR S&P Bank ETF (KBE) has the potential to return just over 3% to its 2021 high set in March, when bond yields peaked.

Caterpillar, Deer, Boeing and General Electric are up 3.4%, 2.9%, 3.86% and 7.85% respectively over the past week.

The ETF SPDR Industrial Select Sector (XLI) ETF, which includes these stocks, is trading about 4% below its 2021 peak today. The ETF SPDR Energy Select Sector (XLE) exchange-traded fund, which holds shares of oil producers and oilfield services companies, is expected by analysts to rise around 7% to return to a one-year high.

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