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Why is QQQ sensitive to yields?


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Why is QQQ sensitive to yields?

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  #1 (permalink)
Duet
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Why are equities, and more specifically nasdaq so sensitive to treasury yields? I hear the phrase used a lot but I don't understand there is a strong relationship.

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 SBtrader82 
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Duet View Post
Why are equities, and more specifically nasdaq so sensitive to treasury yields? I hear the phrase used a lot but I don't understand there is a strong relationship.

@Duet I am not an economist but when I started to read about markets I wanted to understand some big concepts so I think I can give you the general interpretation of this relation. This will be a huge semplification but then you can dive into details searching investopedia, I will give you different ways to interpret the (inverse) relation between yields and equities:
- when yield rise there will be less liquidity in the market, thus less money to buy anything (including shares), thus share price will drop
-when yield rise bonds are more attractive than equities because they are less risky and they offer a stable return, so big money will buy bonds to have a stable yearly cashflow and not risk in equities that may or not pay dividend
-when yield rise financing is more expensive for companies, thus companies results will be worse, thus dividend will be smaller, thus equities will be less attractive

this holds for all equities, so in terms of indexes it should hold for all ES, RTY, NQ etc... if we talk about QQQ since the value of the companies in terms of PER (price earning ratio) is crazy, maybe it's more sensitive, not sure though.

I don't know if you were looking for this kind of answer, maybe I am tell you too basic stuff and I just didn't understand your question.
Pl

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 bobwest 
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Duet View Post
Why are equities, and more specifically nasdaq so sensitive to treasury yields? I hear the phrase used a lot but I don't understand there is a strong relationship.

Equities have always been strongly sensitive to bond yields, for a variety of reasons -- sometimes the relationships change with changing economic conditions, but there's always a big impact on equities. Here are a few reasons, speaking of equites in general and not just NASDAQ -- and note, some may be in effect at some times and not in others, and the relationship between bond and stock prices is not always the same:

- For example, since bond prices go down when bond yields go up (as a matter of arithmetic), bond investors who are more concerned about retaining the value of their initial investment may bail out of bonds as bond yields rise and prices sink. That money may need somewhere to go, which may be in stocks. This would be good for stocks.

- As the highest-grade bond yields go up, so do the yields on all other borrowing, so the cost of business to raise money by borrowing increases. This can be bad for equities, and for the economy in general. So this would tend to be bad for stocks.

- Higher bond yields can reflect a higher expectation (or a current reality) of higher inflation. Much of the time, this is seen as bad for stocks.

- But note that very often, big and long periods of economic expansion, and higher stock prices, are accompanied with higher general prices (inflation), which is often shrugged off as a sign of an economic boom (as it often is.) -- which can be good for stocks. So sometimes the relationship is not that simple.

- Also, note that booms end, and when they do money has usually been easy for some time -- which means, the cost of money, that is, interest rates (and bond yields), have been low, not high.

- Also, investors are always trying to figure out the actions of the Federal Reserve, which sometimes will deliberately raise the rates it controls, which has a ripple effect throughout the economy, in order to cut back on economic overheating to head off inflation. This may cause stocks to decline if they are seen as vulnerable to a Fed-induced turndown.

- Also, money naturally sloshes back and forth between the stock and bond markets as one or the other looks best in terms of appreciation and safety. Many factors affect investor's perceptions and actions in this regard.

With all that, I would add these points:

(1) I am not an economist, nor a bond trader/investor, and don't know all that much about any of this, no matter how many bullet points I may list. Someone who understands all this better could probably do a better job.

(2) Given the central role of bonds, in terms of borrowing (because the Treasury market always influences all other loan markets, including day-to-day business borrowing and ultra-long-term borrowing to raise capital) it is inevitable that the bond market's movements would deeply affect the equity markets, and vise-versa.

(3) All of these relationships can change with changing economic, monetary and business conditions.

I could add that, if you want to go a little insane, one way to do it is carefully read the endless commentary on interest rates and the future of the economy that is always being churned out.

So I will say simply that there in an inevitable influence, back and forth, between the bond and the stock markets, and it has a certain complexity and can change. I generally try not to figure out what is going on, because I have enough complexity in my life already. You are welcome to try, of course.

Bob.

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 SMCJB 
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DISCOUNTED CASH FLOWS !!!

I'm going to over simply this.

Lets say interest rates are 5% and company A is expected to make $1 for the next 3 years.
The $1 of earnings next year is worth $0.95 today.
The $1 of earnings in 2 years time is worth $0.90 today.
The $1 of earnings in 3 years time is worth $0.85 today.
Hence the discounted value of next 3 years earnings is $2.70

Now lets say interest rates increase to 10%.
The $1 of earnings next year is worth $0.90 today.
The $1 of earnings in 2 years time is worth $0.80 today.
The $1 of earnings in 3 years time is worth $0.70 today.
Hence the discounted value of next 3 years earnings is now $2.40 and the company is worth 11.1+% less!

Now imagine Company B, a tech company, or any growth company, that expects to make nothing for the next two years, but to make $3 in year 3. (ie earnings of two companies are the same over next 3 years)
The $0 of earnings next year is worth $0 today.
The $0 of earnings in 2 years time is worth $0 today.
The $3 of earnings in 3 years time is worth $2.55 today.
Hence the discounted value of next 3 years earnings is $2.55

Again lets say interest rates increase to 10%.
The $0 of earnings next year is worth $0 today.
The $0 of earnings in 2 years time is worth $0 today.
The $3 of earnings in 3 years time is worth $2.10 today.
Hence the discounted value of next 3 years earnings is now $2.10 and the company is worth 17.7% less!

Hence companies with greater exposure to long dated earnings (ie growth companies) are far more sensitive to interest rates!

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Mozart2112
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triple q's are tech heavy and tech stocks get their high valuations based on future growth and cash flow and higher rates puts a damper on that growth and value. That doesn't mean tech stocks can't go up in that kind of environment just means things need to reset... the other replies are good too!

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