S&P 500 Falls Sharply as Bond Yields Rise

By Luigi Wewege Friday, February 26, 2021

S&P 500, the benchmark US stock market index, fell sharply on Thursday as investors are worried over increasing bond yields. The Nasdaq Composite index also fell yesterday to mark the biggest decline since October.

A downward trending line graph.

S&P 500 Falls as Bond Yields Rise to a One-Year High

Dow Jones Industrial Average (DJIA) futures dropped over 160 points in Thursday’s after-hours trading session. Similarly, S&P 500 futures and Nasdaq 100 futures declined 0.4% and 0.6%, respectively.

Futures contracts tied to the major three indexes have risen and dropped together with price changes in the 10-year Treasury yield. The bond market appears to be reacting positively to coronavirus vaccine rollouts and the elevated GDP forecast, which is expected to support corporate profits, analysts explained.

However, the reaction could also indicate faster-than-expected inflation in the future. Investors are also concerned that valuations in the tech sector are stretched, which is why shares of Apple, Facebook, Amazon, and others, fell sharply yesterday.

“Until recently, market participants have been able to digest the upward drift in long-term rates, but it appears that the next leg up in interest rates is a bigger bite to chew,” Charlie Ripley, senior investment strategist at Allianz Investment Management, said.

“Looking at where real yields were at, they were simply too low when considering growth expectations, and it’s likely that long-term real yields will continue to drift higher as economic data improves.”

The 10-year US Treasury yield has broken above the 1.6% mark yesterday and hit its highest point in more than a year, spooking investors. Shortly after touching its new high, the yield pulled back to 1.5%. A sharp rise translated into a drop in S&P 500 and two other major indexes.

The upward move is raising concerns among investors who are thinking that the rise could be a result of inflation rather than an economic rebound. The 10-year Treasury yield was standing at 1.09% at the end of last month and closed 2020 far below 1%.

This means that the yield has climbed over a half percentage point in less than two months, which is a significantly sharp move for the bond market.

“To be sure, if bond yields continue to rise and there is a smooth rotation out of growth and defensive stocks into value and cyclical stocks, the Fed will remain sanguine,” said Albert Edwards, strategist at Societe Generale.

Summary

Stock futures contracts, including those of the S&P 500 index, declined on Friday as investors were concerned over rising interest rates. Investors are worried that the surge in rates could be driven by inflation rather than economic recovery.

About the Author


Headshot of Luigi Wewege

Luigi Wewege is the Senior Vice President and Head of Private Banking at Caye International Bank. Outside of the bank, he serves as an instructor at the FinTech School which provides online training courses on the latest technology and innovation developments within the financial services industry. Luigi is also the published author of "The Digital Banking Revolution."

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