Summary of Key Points
Long-term U.S. Treasury bond yields (especially those with a 30-year maturity) have soared to their highest levels since 2007, breaking through 5.3% at one point, triggering a widespread collapse in global tech stocks. This impact was felt across various sectors, from the semiconductor industry in the U.S. stock market to Samsung and Alibaba in the Asia-Pacific region, as well as the computing power and CPO (Cloud Processing Optimization) sectors in the Chinese stock market. The U.S. Treasury Department attempted to cool down the market by increasing the scale of bond repurchases, but the effect only lasted for one day. There are concerns about the structural issues associated with the U.S.'s $40 trillion in debt, as well as the policy contradictions between the Treasury Department (which wants to lower interest rates) and the Federal Reserve (which wants to maintain high interest rates). The future direction of interest rates is currently being awaited in remarks by Federal Reserve Chairman Jerome Powell at the annual meeting of central banks around the world.
1. Why Do Tech Stocks Suffer When U.S. Treasury Bond Yields Rise?
The valuation logic of tech stocks is different from that of traditional industries; they rely on expectations of future earnings over many years. For example, an AI company may not be profitable now, but people believe it could generate significant profits in five years, so the current stock price reflects the discounted value of those future earnings. The benchmark for this discounting is the risk-free rate (which is determined by long-term U.S. Treasury bond yields, as they represent the global risk-free rate).
The higher the interest rate, the more the value of money diminishes over time. For instance, at a rate of 5%, $100 in five years would be worth only $78 today; if the rate rises to 6%, it would be worth only $74. Since tech stocks have a large proportion of their future earnings, they are particularly sensitive to changes in interest rates.
Additionally, the AI industry requires substantial investment in computing power (such as purchasing chips and building data centers), which often involves borrowing money. When interest rates rise, the cost of borrowing increases, eroding the profits of these projects. Companies may then cut their future spending budgets, such as reducing chip purchases, which can lead to declining earnings expectations and subsequent drops in stock prices. A typical example is Micron: although its revenue surged by 346% in the third quarter, its stock price still fell by 7% because the market is more concerned with the future value of money rather than current profits.
2. It's Not Just the U.S.! What Does the Rise in Global Long-Term Bond Yields Mean?
The increase in U.S. Treasury bond yields is not an isolated event. The yield on 30-year Japanese government bonds has reached a record high (4.1%), and those in the UK are near 6%, while France and Germany have also reached their highest levels since 2008 or 2011. The simultaneous rise in long-term yields among G7 countries indicates that the world is re-evaluating the risks associated with sovereign debt.
In simple terms, in the past, buying government bonds from developed countries was considered a safe and profitable investment. However, with the growing debt levels of these countries (such as the U.S.'s $40 trillion), the pressure to repay the debt is increasing, leading investors to demand higher interest rates as a risk premium. This results in higher borrowing costs worldwide, affecting not only tech stocks but also all industries that rely on financing, such as real estate and manufacturing, as well as increasing interest expenses for governments themselves.
3. Why Are the Treasury Department's Market-Saving Measures Ineffective?
On August 19, the U.S. Treasury Department doubled the maximum amount per bond purchase from $2 billion to $4 billion, causing the 30-year Treasury yield to fall by 9 basis points on that day and the U.S. stock market to rebound. However, the yield returned to its previous level within less than 24 hours. Why? The problem is not a short-term shortage of funds but an excessive amount of long-term debt. The Treasury's repurchases are essentially buying its own bonds, which only provides temporary relief to market liquidity and does not address the underlying issue: the U.S. debt has exceeded $40 trillion, and the annual interest payments are growing rapidly (currently approaching the level of the defense budget). There are concerns that the U.S. may need to issue more debt or print more money in the future, which could lead to further inflation and rising interest rates.
Guosen Securities' statement that "increased repurchases are ineffective" reflects this situation—minor adjustments are not enough to solve major problems.
4. Policy Disagreements: The Treasury Department and the Federal Reserve Have Different Goals
There is a key conflict within the U.S. government:
- The Treasury Department (under Janet Yellen): aims to lower long-term interest rates because higher rates increase the government's interest payment burden (with $40 trillion in debt, a 1% increase in rates would result in an additional annual payment of over $400 billion).
- The Federal Reserve (under Jerome Powell): wants to keep long-term interest rates high to indirectly tighten monetary policy. Higher market interest rates reduce borrowing by businesses and individuals, thereby helping to curb inflation.
This disagreement adds to market uncertainty about the future direction of interest rates. If Powell continues to emphasize the need to maintain high interest rates at the central bank meeting, markets may become even more disappointed, leading to further selling of U.S. Treasury bonds and tech stocks.
5. What's Next? The Annual Meeting of Central Banks Is Crucial
The annual meeting of central banks in Wyoming (August 27-29) will be a critical event, with Powell's remarks setting the tone for future market trends. Traders are most interested in whether the Federal Reserve will cut interest rates or how long it will maintain high rates.
If Powell repeats his previous stance (emphasizing that inflation has not been sufficiently reduced and that high rates are necessary), markets may expect interest rates to remain high for a longer period, leading to continued declines in tech stocks and bond prices. If he signals a potential interest rate cut, markets could rebound.
Additionally, Ray Dalio of Bridgewater Associates has warned that the U.S. debt problem is evolving from a long-term risk to a real issue. If it is not addressed (for example, through spending cuts, tax increases, or rate cuts), a debt crisis could erupt within three years, affecting the global economy.
In summary, the root cause of the recent global tech stock slump is the surge in U.S. Treasury bond yields and the re-evaluation of global debt risks. The key to resolving these issues lies in the Federal Reserve's policy decisions. Investors should be cautious, as tech stocks are likely to remain volatile in the short term and should pay close attention to the signals from the central bank meeting and the progress of the U.S. debt situation.