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Rising Bond Yields Fuel Wall Street Sell-off By TipRanks


© Reuters. Rising Bond Yields Fuel Wall Street Sell-off

Rising Treasury bond yields around the world fueled a sell-off on Wall Street this week, as investors re-think valuations.

The benchmark 10-year Treasury bond yield was slightly higher than 1.22% in September, but it traded just above 1.52% on Tuesday morning. The 10-year German Treasury Bond Yield continues to trade with negative yields across Europe. However, they have increased from -0.45% up to -0.2% during the same period. Japan’s 10-year Treasury bonds yields trade with close-to-zero yields. But they are now 0.07% higher.

What’s driving bond yields higher? There are a few things.

Tapering is the possibility that central banks will reduce their Treasury bond-buying programs to combat rising inflation.

As inflation continues to rise, the Eurozone already has slowed its bond-buying programs. Last week, the Federal Reserve announced that it would begin tapering soon, though it didn’t give a specific date.

Jerome H. Powell (Federal Reserve Chair) raised concern that inflation could be more persistent than he believed. He stated that tapering will be complete by 2022. The result is that more bonds will circulate, which could push yields higher.

There is increasing anxiety about the possibility of Congress failing to reach an agreement on the debt limit and that the U.S. Treasury Department will not fulfill its obligations.

Inflation is feared to spiral out of control due to rising energy costs. The Federal Reserve will need to increase short-term interest rates, in addition to tempering.

As these yields serve as discounting factors in equity valuation models, rising bond yields lower future equity valuations.

The sell-off was widespread, particularly in high-tech, where valuations have been overextended. In late morning trade, the tech-heavy Nasdaq was down 400 points, close to 2.8%, while the and Dow Jones were down close to 2%.

Compounding the problem, a couple of analyst downgrades on the semiconductor sector added to Nasdaq’s sell-off.

Bottom line: Investors may need to review their portfolios soon as the long-running period of low interest rates could be ending.

Disclosure: Panos Mourdoukoutas held no shares in any of the stocks at publication.

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