Rising interest rates could keep a choke hold on tech and growth

Rising bond yields could keep a choke hold on tech and growth stocks for now, as investors bet the Federal Reserve will raise interest rates four or more times this year.

Stocks tumbled Monday, with tech among the worst performing sector as Treasury yields jumped. The Nasdaq was hard hit, slumping nearly 2% while the S&P 500 lost about 1.5% at midday.

The 10-year yield, which moves opposite price, was at a new post-pandemic high of 1.84% Monday, after trading at just under 1.8% Friday. The 2-year yield also zipped higher, crossing above 1% to 1.03%. For perspective, the 2-year, which most reflects Fed policy, was just above 0.5% at the beginning of December.

“I think a lot of this is stemming just from the fact that people are starting to get even more aggressive on their Fed calls,” said Jim Caron, head of macro strategies, global fixed income at Morgan Stanley Investment Management. “It was two rate hikes and then three and now it’s four, and it could be more than four.”

Bond pros expect yields to continue to rise into the Fed’s meeting Jan. 25 and 26, and then will take their cue from the Fed’s tone. That could mean rough sledding for stocks. Yields rise as prices fall, and bonds are selling off as investors repostion ahead of the Fed meeting.

Caron said the market is full of hawkish chatter, like whether the Fed could possibly make a surprise hike in January or whether it could raise rates by a half percentage point in March, rather than the quarter point most expect. “The ante is being upped, and as people start discussing and talking about these things, the equity market doesn’t take it so well,” he said.

He said the fed funds futures market is pricing in four quarter point hikes for 2022, with the slight possiblity of more than a quarter point in March. There’s also a very slight chance of a hike in January being priced in.

The Fed had already set a hawkish tone when it met in December, but the minutes from that meeting showed central bankers were even more bent on tightening. The minutes revealed Fed officials had discussed shrinking its balance sheet starting this year. That is in addtion to the three quarter point rate hikes contained in its forecast.

But Fed speakers have also added to the speculation that more rate hikes are coming. St. Louis Fed President James Bullard last week said he could see four interest rate hikes this year. Fed Governor Christopher Waller Friday said three rate hikes would be a good baseline but there could be fewer, or as many as five depending on the course of inflation.

Bond strategists expect the closely watched 10-year yield will be on a quick path to 2%. The 10-year is important because it influences home mortgage rates and other business and consumer loans.

It is also the bond barometer the stock market watches most, and it’s moves can influence tech and other stocks…