Fast-Growing Stocks May Be At Risk From Falling Bond Prices

Fast-Growing Stocks May Be At Risk From Falling Bond Prices

over 3 years ago2 mins

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US government bond prices are falling sharply – and if that trend continues then the hottest stocks in your portfolio this year could be in for a shock 🥵

What does this mean?

High demand from coronavirus-rattled investors and the country’s central bank meant US bond prices soared in the first quarter of the year – pushing their yields, which move inversely to prices, to record lows. But the $20 trillion "Treasury" market has barely budged since – until now.

Bond yields have shot up in recent days, hitting their highest level since a brief spike in June. And this may be only the beginning: with the US economy rebounding sooner than expected, both investor risk appetite and inflation could rise, reducing the relative attraction of boring-but-dependable bonds.

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The scale of the selloff may depend on what happens in November’s US elections; last week’s market action was probably a response to the increased likelihood of a clean sweep for the Democractic Party clearing the way to a further economy-boosting stimulus package. But as expectations for bond yield and broader interest rate rises move forward, some investors are concerned about the impact a sudden jump could have on the biggest US stocks 😬

Why should I care?

Growth” stocks – companies, including the tech giants, where revenue and/or profit growth is significantly higher than average – have been responsible for much of the US S&P 500 index’s recovery since March. But a “rates scare” wherein bond yields rapidly pushed higher would likely knock their valuations, partly thanks to the fact that increasing inflation reduces the value of future cash flow.

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By contrast, “value” stocks – those which appear cheap relative to their size and profit – would stand to gain, as would “cyclical” companies like banks whose fortunes are tied to that of the economy. (See our Pack on Investment Styles for more on these different investing approaches.)

There are caveats, however. For one thing, significant inflation may still be a couple of years away. For another, the US Federal Reserve – with its unlimited bond-buying powers – could well step in and prop up prices, preventing higher interest rates from hampering economic growth. That’s something investment bank TD Securities sees happening as soon as December. But if it doesn’t, then backing a US value stock index by buying a simple exchange-traded fund like the Vanguard Russell 1000 Value ETF could be a canny move… 🤔

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Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

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