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QuestionsCategory: Investor PsychologyRising Bond Yields and Stocks
Calvin Lim asked 2 years ago

Hi Team, should investors be overly worried about the current situation where bonds are competing with stocks as an investment, because bonds are starting to become more attractive? I have some investments in US technology stocks and I’m amazed how a slight increase in bond yields can easily drive down the prices of some stocks. What kind of mindset or approachshould we adopt in such a situation even though the company fundamentals are still doing good? 
Many thanks in advance for your kind advice!

4 Answers
Ajit Karande answered 2 years ago

Thanks, Calvin for bringing up this issue. From December 2020 to date the yield went up from 0.5% to 1.5 % so we can take it a 300% increase? Apologies if I got this wrong.
2021 is a very tricky market. We’re going to be in an environment where interest rates are going up and inflation expectations are going up. Very few people today have experience investing in such a market. I hope the Fifth Person team could consider making a separate video or publish an analysis- Is this a buying opportunity for tech stocks?
One could consider buying on a dip like last Friday else should we buy now or wait for 6-7 months?

Victor Chng answered 2 years ago

Hi Calvin & Ajit,
Investors are worried that the market will crash since the bond yield keep increasing. To be honest, it is hard to predict when the market will crash and sometime overvalued market can last a long time. The key is to stay invested in fundamental good companies so if the market crash those companies that you owned will still recovered.


My advise is don;t time the market, just focus on the company.

Hope this helps :)

Jieren Zheng answered 2 years ago

Just sharing my thoughts that rising interest rates would mean that the equity premium is reduced, meaning that you are less compensated to take risks. In the modern finance, it makes more sense to grab more bonds, as it is “less worth it to take risks”.

But I would think that if a business has stellar performance, why would you let them go is beyond me, bond yields do not affect earnings etc.

Ajit Karande replied 2 years ago

From what I understand is that rising bond yields affect most to those whose PE is very high ( example Tesla , NIO etc) because of the DCF. The DCF uses US 10 Y treasury rates for its calculations. Tech stocks got affected as most of them have their earnings very far away.
Gold, fixed income assets like utilities and REITS also affected due to rising bond yields.

Calvin Lim answered 2 years ago

Thank you Victor, Jieren and Ajit for your advice and inputs!