The yield on the 10-year US Treasury has moved back to levels last seen one-year ago as traders continue to fret about a rise in inflation down the line, despite Fed chair Jerome Powell’s dovish testimony this week. Mr. Powell said that US inflation remains soft and that the central bank will continue to provide the economy with as much assistance as needed to get the economy back on a stable footing. The front-end of the US yield curve remains anchored with Fed funds stuck at a historical low of 0.25% and the closely watched 10-year/2-year US rate differential continues to climb, indicating growth and inflation ahead.

US 10-Year Treasury Yield Daily Price Chart (July 2020 - February 25, 2021)

With US Treasury yields on the rise, other asset classes become less attractive, especially the technology sector where valuations have been running at extremely rich levels for months. Higher US yields are a precursor of growth and investors look set to continue to rotate out of the tech sector and into growth stocks, adding to the bearish sentiment in the tech space. The recent shake-out in the technology sector looks set to continue. One area of the stock market that normally benefits from rising interest rates is the financial sector. When interest rates rise, banks increase their consumer rates, widening the differential between borrowing and lending and thus taking a larger margin.

US Tech 100 (Nasdaq) Daily Price Chart (February 2020 - February 25, 2021)

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