Morgan Stanley: Tech rally could be threatened by flattening yield curve

• Inflationary pressures force US Fed to trade
• Inverted yield curve
• Morgan Stanley is worried about tech stocks

Apple, Alphabet and Amazon are just a few of the major US tech giants that fell sharply in January and February. In March, however, their shares began to recover, so that they were almost able to make up for the price losses they had suffered since the beginning of the year. But as Bloomberg reports, Lisa Shalett, Chief Investment Officer of Wealth Management at US investment bank Morgan Stanley, sees this recovery threatened by the flattening yield curve.

Inverse yield curve

A few days ago, a rare and worrying phenomenon was observed in the US bond market: After the yield curve initially flattened, the yield on 5-year Treasury bonds finally exceeded even that of 30-year Treasury bonds – for the first time since 2006.

As a rule, fixed-income securities with a longer remaining term yield higher returns than securities with a shorter remaining term, after all investors who commit themselves longer take a higher risk and are rewarded with a higher interest rate. However, if the opposite is the case, one speaks of an inverse interest rate structure or an inverse market. This can happen if the central bank drives up short-term interest rates by raising interest rates, or if investors who fear an economic downturn invest more in long-term bonds, thereby depressing their yields. An inverted yield curve is generally regarded as a warning sign of impending economic problems and possibly even an impending recession.

In fact, US Federal Reserve Board member Lael Brainard recently signaled a determined tightening of monetary policy. Reducing the currently very high inflationary pressures is “a priority,” she said, announcing a “series” of rate hikes. Strong demand for goods and services as well as bottlenecks in the global supply chains after the Corona crisis are currently causing inflation to get out of hand, so that it climbed to a 40-year high in the USA in February. The pressure is now also being increased by the Ukraine war, because the sanctions against Russia could make raw materials more expensive and fuel inflation further.

Morgan Stanley skeptical about stocks

As “Bloomberg” reported, Lisa Shalett considers the recovery rally in tech stocks to be “irritating” because it comes at a time of rising interest rates. Finally, as expected, the US Federal Reserve initiated the turnaround in interest rates in March and increased its key interest rate for the first time since the beginning of the corona pandemic.

The 5-year and 30-year Treasury yield curves are flattening and “as these and other yield curves move toward inversion, the budding recovery in tech giant stocks could be stalled,” Lisa Shalett is quoted as saying. “Given the current valuations, earnings expectations and the risks associated with the new Fed policy, we are not bullish on equities,” said the expert.

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