In recent years, technology stocks have contributed to the rise of US stocks on their own, but now they are lower because of strong expectations of a Fed interest rate hike, which has triggered a sharp rise in US bond yields. Interest rates on US debt soared at the start of the year as usual in 2021, when technology stocks plummeted, and then hit record highs as interest rates fell. Taking history as a mirror, will this year be copied for last year?

Is 2021 a rehearsal?

Interest rates on US bonds rose at the start of 2021 until they hit a high in the week of March 14, when the yield on 10-year Treasuries rose above 1.63 per cent for the first time in a year. At that time, the surge in US bond interest rates was mainly due to the resurgence of inflation fears due to the improvement of US economic data, the expansion of the stimulus package and the resurgence of inflation fears.

After the 2020 epidemic, low interest rates, large-scale liquidity easing and less of the impact of the epidemic led to a rapid rebound in technology stocks and soaring valuations. However, since the rapid rise in US bond interest rates in the first quarter of 2021, the valuation level of technology leader FAAMNG has contracted much more than the overall market, with dynamic PE falling to about 30 times from a high of 37 times at the end of January.

But on March 18, Powell, referring to the significant jump in US bond yields over the past month, pointed out that it was important that financial conditions remained loose and, overall, financial conditions remained highly loose. So there is "no need to react to the sharp rise in US bond yields over the past month". And Powell was still clinging to the "inflation pause" when interest rates on U. S. debt began to fall back this week.

As a result, the yield on 10-year Treasuries fell nearly 0.5 percentage points from the end of March to mid-late August last year. As a result, the Nasdaq composite index rose, and the Nasdaq index rebounded from mid-to-late March, and the pullback did not prevent it from hitting a new high on Aug. 29. During this period, the Nasdaq 100 index rose 17%, more than 4 percentage points higher than the s & p 500 index. Both the Nasdaq 100 and the S & P 500 hit record highs that week. With the exception of Amazon.Com Inc, the shares of the other members of FAAMG rose a lot, with Alphabet Inc-CL C up 37%, Microsoft Corp up 28%, Apple Inc and Meta Platforms both up more than 20%.

Thus it can be seen that there is a fluctuating relationship between US debt interest rates and the US stock technology sector.Of course, the correlation between technology stocks and government bond interest rates is not new; the rise in yields in 2018, for example, led to a sharp fall in the Nasdaq 100 index later in the year.

Technology stocks get off to a tough start in 2022, inheriting the decline and then the rise in 2021?

History shows that QE has a big impact on bond yields when it is announced, not when it is implemented; the same is true of shrinking tables.

At the beginning of this year, a copy of the minutes of the Federal Reserve's December meeting beat the price of US bonds to the ground. The yield on the 10-year Treasury note has jumped by more than 50 basis points in the past six weeks. At present, Treasury yields are rising, with the two-year yield breaking through 1% on Tuesday. The yield on the 10-year note broke through 1.85% for the first time in two years and stood above 1.9% at one point. This year, expectations of the contraction did not really surface until January 6, the day the Fed released the minutes of its December policy meeting, which recorded the Fed's discussion of the contraction in December.

According to Bernanke's framework, the main factors affecting 10-year Treasury yields are divided into three main categories: real natural interest rates, inflation expectations and maturity premiums. The main factor driving the recent rapid rise in US bond yields is inflation expectations.When inflation expectations rise, interest rate hikes are expected to rise, and so do the yields investors require to invest in Treasuries. The recent surge in interest rates on US debt is mainly due to rising market expectations about the speed and extent of the Fed's rate hike.

In 2022, the Nasdaq composite index had its worst start to 2016. On Tuesday, the index recorded its third one-day drop of more than 2.5 per cent this year, down 7 per cent so far this month and about 10 per cent from its record high set at the end of November. Technology stocks are likely to fall further before they rebound.

And quantitative austerity (QT), the reduction of the Fed's balance sheet, is now on the agenda for 2022. That means Treasury yields are likely to be higher, which could further hit US stock valuations, and stocks, especially technology stocks, are likely to weaken further.

How deep is the impact of the Fed's shrinking schedule on US bond interest rates?

The direct impact of the contraction on US debt interest rates is expected to be easily affected by many variables, so much so that it is almost a futile task. However, Morgan Stanley's analysts tried to measure this, and they found that, based on experience,Every $100 billion change in the Fed's balance sheet affects interest rates on 10-year Treasuries by about 4-6 basis points.

Raphael Bostic, chairman of the Atlanta Fed, said in an interview with the media a week after the Fed released the minutes of its December meeting that at least $1.5 trillion of excess liquidity in the United States needs to be removed from the financial system.Adding Bostic's forecast of excess liquidity in the US to Morgan Stanley's model calculates that the Fed's withdrawal of $1.5 trillion could push 10-year Treasury yields 60-90 basis points higher.

Morgan Stanley raised his yield forecast for 10-year Treasuries to 2.30% at the end of the year, which is bad news for growth stocks that are sensitive to rising yields.

How deep is the impact of higher US bond interest rates on US stocks?

Us companies' future cash flows and profits will be discounted at a higher discount rate, so valuations will be hit, with technology stocks particularly vulnerable. Peter Garnry, head of equity strategy at Saxo Bank, says technology stocks are extremely vulnerable. He observes the movements of the Nasdaq, S & P 500s and Eurostoxx 600s and MSCI global stock indices based on the daily movements of interest rates on 10-year US bonds.

Garnry's estimate starts in November 2020, which he sees as a turning point in the epidemic, when Pfizer Inc said his COVID-19 vaccine was more than 90 per cent effective in protecting people with no history of infection. In this wayHe found that during a period when 10-year Treasury yields rose 5-14 basis points, NASDAQ underperformed global stocks by an average of 0.6%.Nasdaq outperformed global equities by an average of 0.4% during a period when 10-year Treasury yields fell 5-16 basis points.

So as US inflation hits a 40-year high and the Fed prepares to shrink, tech investors should seek refuge.

"the higher discount rate is a very strong resistance," Garnry said. If you are a smart technology investor, you now need to fine-tune your investment and re-evaluate your other parameters. "

A storm is brewing in the technology industry, and big technology companies may be the safest ports. Giants such as Amazon.Com Inc, Alphabet Inc-CL C and Microsoft Corp are sitting on a lot of cash and are better able to pass on higher costs to their customers.

But the share prices of small-cap and "subversive" companies in the technology industry have fallen sharply. Nothing understands this better than ARK Innovation ETF, a fund owned by Cathie Wood. The fund has fallen more than 50 per cent since its peak in February last year. Since the beginning of November, it has fallen by nearly 40%. November was also the beginning of the Fed's hawkish stance, and interest rates on U. S. debt began to soar.

Since the Nasdaq peaked on November 22nd last year, its total return has plummeted 1/3. The same is true of Mu Mu's ARK Next Generation Internet ETF, while other tech stocks and small tech ETF underperform the market to varying degrees.

Alex Ely, Macquarie Asset Management's chief investment officer for US growth stocks, believes that technology stocks are long-term investments, so they are likely to fall further now, but he points out that corporate fundamentals are more important than bond yield volatility.Therefore, the performance of US stock companies should also be the focus of investment, rather than just focusing on the impact of interest rates. Netflix Inc will announce his financial results tomorrow morning, and next week, large technology stocks such as Apple Inc, Tesla, Inc., Microsoft Corp and Alphabet Inc-CL C will also announce their financial results.

Conclusion

History does not always repeat itself, but it does show a certain pattern. The story between US debt and technology stocks last year is not necessarily going to happen this year, especially when US inflation is so hot. Share prices are bound to suffer if investor concerns about the Fed's scaling back its bond-buying program grow. Next, technology stocks are not expected to have a good time without the shelter of Powell's "temporary inflation theory". However, if economic growth remains strong, higher bond yields do not necessarily pose a risk to technology stocks, and strong results can provide a buffer for technology stocks that keep their performance bright.