over 3 years ago • 2 mins
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 🥵
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.
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 😬
“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.
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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