The yield on 30-year US Treasury bonds hit 5.32% on August 17, the highest level since 2007. This rise has worried investors in riskier assets, especially technology stocks, which depend heavily on debt for growth. The increase in yields comes as the US government boosts debt sales to cover its federal deficit. Major tech companies are also borrowing more through bonds to fund investments in artificial intelligence (AI) infrastructure.
Bond Market Dynamics
Several factors are driving the rise in long-term yields. A report from Citadel Securities highlighted that the US Federal Reserve's hesitation to raise interest rates amid ongoing inflation is a major reason for the high yields. Nohshad Shah from Citadel Securities said, "The inability of policymakers to make progress on fixing the roof while the sun is shining is a key reason [long-term bond yields] remain so stubbornly high."
In Asia, weaker economic data adds to the situation. Japan's economy grew by only 1.1% in annualized terms in the second quarter, missing expectations. This has increased pressure on the Bank of Japan to consider more aggressive interest rate hikes to improve its credibility in fighting inflation. The joint intervention in currency markets by the US and Japan in late July has not significantly strengthened the yen. As a result, investors expect a faster pace of interest rate increases.
Impact on Technology Stocks
Rising Treasury yields are starting to impact valuations in risk assets, especially in the technology sector. He Siyao, a fund manager at HSBC Jintrust Fund Management, explained, "Rising US Treasury yields put pressure on valuations across risk assets. For equities, AI is becoming more sensitive to the interest rate, because industry funding shifts from free cash flow to debt financing." This shift may cloud the earnings outlook for tech firms and increase volatility in the sector.
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High US Treasury yields are likely to pressure technology stocks and other risk assets due to rising borrowing costs. Investors are particularly worried about the sustainability of AI investments as funding moves from free cash flow to debt financing. Keep an eye on upcoming economic data releases that could affect interest rate expectations and market sentiment.
Based on reporting by: scmp.com