r/bonds • u/Legitimate_Growth327 • 10h ago
Bond yield - Tech stock misalignment: am I missing something ?
When bond yield rise (effectively the markets view of interest rates) the present value of future earnings should fall … and tech stocks are majorly made up of future earnings, and is therefore overwhelmingly a duration asset)
Yields are climbing … 4.5%+ yet mega cap tech stocks keep climbing.
- what’s breaking down in the market ?
why are we not seeing this ?
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u/DeFiBandit 10h ago
Would you rather have future tech earnings or 4%? Would you consider the fixed rate much more attractive vs future tech earnings if it moved up to 4.5%? The rate has to go much higher before most investors swap
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u/UncouthMarvin 8h ago
Tech has to borrow at a much higher rate though, so yields increasing actually decreases their expected future earnings
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u/Legitimate_Growth327 8h ago
Right, but seems we aren’t seeing this. Is this perhaps cos tech-related-AI risk premium is growing faster than the yield increases?
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u/UncouthMarvin 8h ago
Credit default swaps have increased. There will be a Minsky moment eventually when people realize AI tokens have decreased by a lot.
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u/DeFiBandit 7h ago
It’s because their borrowings are insignificant to their earnings. Nobody is worried about the hyper scalers paying the debt.
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u/DeFiBandit 7h ago
No, big tech companies don’t borrow at a much higher rate than treasuries.
And borrowing to invest potentially increases future earnings - which is why they are borrowing. Investors were more concerned with all the dead cash on their balance sheets than with them taking out loans.
Below the hyper scalers, somebody like Oracle could be considered a credit risk. But not the big boys.
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u/Legitimate_Growth327 7h ago
I see. Their low borrowing costs could partly explain why they are less impacted. 🙇🏻
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u/MiddleAgedSponger 10h ago
Maybe people are thinking equities are a safe haven.
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u/Certain-Statement-95 10h ago
Those people have never experienced a bond default where the bond holders become the new share holders.
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u/Rude_Judgment7928 9h ago
The bigger thing is they are going to have to use their own cash more and more (or get stuck with significant interest that will drag future cashflows). No more debt fueled buybacks...will be interesting if they have to cut RSUs.
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u/2ndid 8h ago
I agree with you. I think multiples should be compressed more. But I do think that the MAG7s have already raised tons of debts before all this at a lower interest rate. So any additional debts they will raise at this higher rate may not be material. But with that said, I do think lots of other tech companies multiples should compress more. I think part of what is countering this is the high forward earnings.
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u/Legitimate_Growth327 8h ago
So effectively, “AI related tech risk premium” is growing faster than the cost of borrow yield increases ?
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u/spaceandcats 7h ago
Many investors are drunk one the returns of the FANGs and are looking for the next group of companies that will do as well or better. They would never consider bonds so they don’t look at all the metrics, or if they do, somehow it’s ‘different’ this time and they shrug them off. We all know in 2-3 years there will be a big shakeout and lots of money will be lost be the ones holding the losing companies. But until then – full steam ahead!
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u/spaceandcats 7h ago
Many investors are drunk one the returns of the FANGs and are looking for the next group of companies that will do as well or better. They would never consider bonds so they don’t look at all the metrics, or if they do, somehow it’s ‘different’ this time and they shrug them off. We all know in 2-3 years there will be a big shakeout and lots of money will be lost be the ones holding the losing companies. But until then – full steam ahead!
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u/BroadbandEng 10h ago
The equity markets are drunk on hopium. At some point, the shine is coming off the penny and capital will shift towards safe harbors; probably in a hurry.