US Treasury Yields Hit 16-Year High, Tech Stocks 'Wobble'

Fed Signals Prolonged High Rates
US 10-Year Treasury Yield Surpasses 4.5%
Tech Rally Cools... Nasdaq Down 5.4% This Month

U.S. technology stocks, which had rallied earlier this year, are showing signs of losing momentum. Analysts suggest that the surge in global bond yields, including the U.S. 10-year Treasury yield reaching its highest level in 16 years amid expectations of prolonged high interest rates, is leading to a decline in tech stocks.

According to the New York stock market on the 25th (local time), the Nasdaq index, which is centered on technology stocks, fell 5.4% from August 1 to 25. Although it rose 37.1% from the beginning of the year through July, it dropped 2.2% in August and has fallen more than 5% this month alone.

Apple, the leader of Nasdaq, declined 6.3% this month. Microsoft (MS) fell 3.1%, while Amazon, Tesla, and Alphabet (Class A) dropped 4.9%, 4.3%, and 3.7%, respectively. Nvidia, the biggest beneficiary of generative artificial intelligence (AI) and the driver of this year’s tech rally, plunged as much as 14.5%.

The surge in bond yields since last month has driven funds into safe-haven assets. The sharp rise in borrowing costs due to soaring bond yields has also limited capital inflows into the stock market. The U.S. 10-year Treasury yield, which serves as a global bond yield benchmark, was recorded at 4.559% around 8:50 p.m. in the New York bond market on the day. This is the highest level in 16 years since October 2007, before the global financial crisis. The U.S. 10-year Treasury yield is a sensitive indicator for investors as it serves as the benchmark for all borrowing costs, from mortgage loans to corporate loans. The 2-year yield, which is sensitive to monetary policy, also exceeded the 5.14% level.

The Wall Street Journal (WSJ) analyzed that the benchmark yield rising into the 4% range has created a turning point in the stock market. The stock rally stopped after the U.S. 10-year Treasury yield reached 4% at the end of July. The Nasdaq index fell 2.2% last month when the 10-year Treasury yield hit the low 4% range. This month, as the yield touched the 4.5% range, the Nasdaq’s decline widened to more than 5%. Last month, the S&P 500 index, which is centered on large-cap stocks, fell 3.8%, and the blue-chip-focused Dow Jones Industrial Average dropped 2.1%.

The recent rise in yields occurred amid indications from the Federal Reserve (Fed) of prolonged high interest rates. At the Federal Open Market Committee (FOMC) meeting held on the 20th, the possibility of additional rate hikes within the year was raised, and the market broadly anticipated that high rates could persist longer than expected. In the September dot plot, the Fed raised the median rate forecast for the end of next year from 4.6% to 5.1%, and for the end of 2025 from 3.4% to 3.9%. This signals that even if rate cuts begin next year, high rates in the 5% range will continue.

Additionally, recent oil-driven inflation has increased market uncertainty and added upward pressure on Treasury yields. Austan Goolsbee, president of the Federal Reserve Bank of Chicago and considered a prominent dove within the Fed, appeared on CNBC’s Squawk Box that day and stated, “It’s getting closer to the point where how long rates stay high is more important than how high they go.”

Market outlooks for future U.S. Treasury yields are mixed. Richard Chambers, head of repo trading at Goldman Sachs, conveyed that “the market recognizes that yields will be higher in the medium to long term.” On the other hand, some analysts believe that U.S. Treasury yields have peaked. Subadra Rajappa, head of U.S. rates strategy at Soci?t? G?n?rale, said, “We are not confident about how much further or how long yields will continue to rise,” adding, “If yields remain high for a prolonged period, it would indicate a major fracture in the U.S. or global economy.”