Why is everyone talking about bond yields?

Why is everyone discussing rising bond yields and what do they mean for ASX 200 tech shares and the broader share market?

bond yields represented by wooden blocks spelling bonds atop coins

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Why do bond yields matter to ASX share investors and why is everyone suddenly talking about them? 

What do rising bond yields mean? 

Benchmark United States Government bond yields have been downward trending since late 2018. Yields have managed to plummet from as high as 3.25% in October 2018 to as low as 0.50% in late 2020.  

Record low bond yields mean that investors are forced to seek out higher-risk investments to gain a meaningful return. This translates to a flow of funds from bond markets into higher risk assets such as equity markets. Lower borrowing rates also buoy the economy and encourage greater economic activity from businesses and consumers. 

More recently, bond yields have surged from lows of 0.50% to 1.55% last night. Rising yields have a ripple effect across the economy and the stock market. Higher yields, or interest rates, translate to higher borrowing costs for individuals and businesses. As bond yields inch higher, this could also result in a flow of funds from share markets back into bond markets. 

Furthermore, one of the dangers of record low, near-zero interest rates is that they can inflate asset prices. As bond yields have pushed higher, the sectors that benefitted the most from low yields, such as tech, have been hit the hardest. Meanwhile, cyclical industries and sectors that generate strong cash flows, such as financials, infrastructure and commodities, typically perform better under higher interest rate environments. 

For example, the S&P/ASX 200 Info Tech Index (ASX: XIJ) slumped by more than 10% in February, despite the S&P/ASX 200 Index (ASX: XJO) closing 1% higher. In the last few weeks, the US tech-heavy Nasdaq Composite (NASDAQ: .IXIC) has consistently underperformed the S&P 500 Index (SP: .INX) and the Dow Jones Industrial Average Index (DJX: .DJI).

Household names such as Facebook Inc (NASDAQ: FB)Apple Inc (NASDAQ: AAPL)Amazon.com Inc (NASDAQ: AMZN) and Alphabet Inc (NASDAQ: GOOGL) have all been dragging the Nasdaq lower recently.

ASX 200 tech shares slammed

The most richly-valued sector, tech, is arguably the most vulnerable to rising bond yields. This can be evidenced by the sea of red across most tech and growth related shares today. Most notably, the Afterpay Ltd (ASX: APT) share price has slumped nearly 7% to a 3-month low around the $110 level. Meanwhile, other large cap tech shares such as Xero Limited (ASX: XRO), WiseTech Global Ltd (ASX: WTC) and NextDC Ltd (ASX: NXT) have also ground lower. 

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. Kerry Sun has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of and recommends Alphabet (A shares), Amazon, Apple, and Facebook and recommends the following options: long January 2022 $1920 calls on Amazon and short January 2022 $1940 calls on Amazon. The Motley Fool Australia owns shares of AFTERPAY T FPO, WiseTech Global, and Xero. The Motley Fool Australia has recommended Alphabet (A shares), Amazon, Apple, and Facebook. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on Share Market News

Doctor doing a telemedicine using laptop at a medical clinic
Healthcare Shares

3 small-cap ASX healthcare shares 'with strong prospects'

Fund manager IML discusses why these 3 ASX healthcare shares are likely to rise in value.

Read more »

Magnifying glass on a rising interest rate graph.
Share Market News

Will the RBA finally cut interest rates next week?

Let's see what economists are saying about the central bank's meeting.

Read more »

A couple sits on a sofa, each clutching their heads in horror and disbelief, while looking at a laptop screen.
Share Gainers

Here are the top 10 ASX 200 shares today

Investors endured a rough Friday to close the trading week today.

Read more »

a man wearing old fashioned aviator cap and goggles emerges from the top of a cannon pointed towards the sky. He is holding a phone and taking a selfie.
Broker Notes

7 ASX All Ords shares elevated to 'strong buy' status in October

The brokers turned bullish on these ASX companies last month.

Read more »

A businessman compares the growth trajectory of property versus shares.
Share Market News

How ASX shares vs. property performed in October

The national home value rose for the 21st consecutive month while the ASX 200 dipped.

Read more »

Person with thumbs down and a red sad face poster covering the face.
Share Fallers

The worst 3 ASX 200 stocks to buy and hold in October unmasked

You would have done well to avoid these three ASX 200 stocks in October.

Read more »

A female Woolworths customer leans on her shopping trolley as she rests her chin in her hand thinking about what to buy for dinner while also wondering why the Woolworths share price isn't doing as well as Coles recently
52-Week Lows

Why is the Woolworths share price at its lowest point since 2020?

We haven't seen Woolies shares this low since COVID.

Read more »

A man sits in despair at his computer with his hands either side of his head, staring into the screen with a pained and anguished look on his face, in a home office setting.
Share Fallers

Why AFT, Amcor, Corporate Travel, and Macquarie shares are falling today

These shares are ending the week in the red. But why?

Read more »