Yield spikes are a reflection of market equity valuation.

How I interpret this is that there’s real fear that some companies in the market won’t be able to pay their debt. Therefore, bonds trade cheap, hence spiking the yield.

Large Tech companies (FANGs) are not going to default on their debt.... so why does yield spikes impact their stock value?

  • 1
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    – 1muflon1
    Mar 19 '21 at 9:40
  • $\begingroup$ Why don't you think tech companies will default on their debt? $\endgroup$
    – user253751
    Mar 19 '21 at 11:10
  • $\begingroup$ @user253751 I cleared up my question. $\endgroup$
    – Kam
    Mar 19 '21 at 15:56

You are referring to recent market events where the yield of US Treasury bonds has risen and some tech stocks have been falling? My interpretation of this situation is that the rise in yields reflects growing optimism in the broader economy , as we overcome Covid and head back to work. In the stock market, this leads to a preference for traditional stocks that do well in a ‘normal’ economy, and a rotation away from the tech stocks that did especially well in the pandemic. This we have a correlation rather than a causation.


The answer is in inflation expectation. Bond yields and inflation are intertwined. As we know, inflation eats the future returns of investments, so when people expect more inflation, bond yields tend to rise alongside them. Inflation also reduced the future stream of payments. For example, 1 dollar of profit today, would be valued at 0,5 dollar tomorrow with 100% inflation. This means that businesses's valuation that are heavily reliant on future returns tends to decline, since future profits are valued less than present ones. Those companies are typically technology firms, like Palantir, which recieve a lot of hype, without current profits, or revenues, but are highly thought to return big profits in the future.

See: https://www.investopedia.com/articles/bonds/09/bond-market-interest-rates.asp for bond yields and inflation.


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