Some of the riskiest assets on the market rise in tandem with bond yields. What gives?
Bitcoin has rallied this week, hitting $25,000 for the first time since August. The tech-heavy Nasdaq 100 index is up 2.4% this week. Even meme stocks are making a comeback.
This is in contrast to much of last year when the broader market – and a few pockets in particular – were very sensitive to bond yields. Lately there has been a rush on some of the riskiest trades, from FOMO call options to betting on crypto and unprofitable tech companies.
“It’s just trading like the pandemic market again, even though interest rates are much much higher,” said Zhiwei Ren, portfolio manager at Penn Mutual Asset Management.
For some investors and analysts, the momentum may not last long. The yield on the 10-year Treasury yield recently hovered around 3.847%, some of the highest levels in the last decade, and has been rising in recent sessions. Many investors have thrown in the towel to bet on a Fed pivot later this year.
Marko Kolanovic of JPMorgan Chase & Co. said in a note to clients that a rise in interest rates is typically accompanied by a sell-off in the Nasdaq. Instead, the ad has recovered 15% at the start of the year.
Similarly, valuations of the tech-heavy Nasdaq 100 Index have risen. The enterprise value-to-sales ratio in the index recently hovered around 3.98, roughly in line with 2020 levels. However, government bond yields are significantly higher than they were in the depths of the pandemic – a sign that valuations may be weakening continue to rise room to fall.
For some investors, it makes the IPO a head-scratcher this year. “It’s very hard to justify the rally we’ve seen so far this year,” said Mr. Ren.