Nasdaq 100 index analysis: US real yields dominate

2022年9月15日

The Nasdaq 100 index (US 100) has moved in the opposite direction of US real yields (DFII10), which are the difference between nominal Treasury yields and market-based inflation expectations (also known as Breakeven yields). Real yields serve as a measure of the Fed's rate tightening aggressiveness.

The 30-day correlation between Nasdaq 100 and US real yields is currently at -0.83, indicating a strong and inverse negative relationship.

US real yields have risen dramatically since the start of the Fed hiking cycle in mid-March, from -0.7% to around 1% as of this writing, reflecting increased market expectations of a more stringent monetary policy.

This means that the nominal yield on a 10-year Treasury (3.45%) is currently about 1% higher than the market measure of inflation expectations for the next 10 years (2.45%).

Positive real returns on a safe asset like US Treasuries undoubtedly act as a deterrent to investing in riskier assets like stocks.

Technology stocks are also way more sensitive to changes in Federal Reserve interest rates than stocks in other industries. Higher interest rates reduce the long-term expected cash flows for tech companies. As a result, tech stocks fall more than the overall stock market. The Nasdaq 100 has underperformed the broader S&P 500 (US 500), which is down 17.7% year to date versus -26.5% for the tech-heavy index.

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After the US inflation rate continued to beat market expectations this week, markets have already fully priced in a 75 basis point hike at the FOMC meeting next week.

The chances of another 75 basis point hike in November are also increasing, which would bring US interest rates to 4% ahead of the December meeting. Stronger rate hikes could put additional pressure on the tech-heavy Nasdaq index.