New-age tech stocks gain as global bond yields slump

The sharp decline in global government bond yields on September 28 following the Bank of England’s emergency intervention in the UK bond market has helped India’s new-age technology stocks post strong gains on September 29.

Indian technology startups, a clutch of whom made their debut on the bourses in 2021, saw gains in line with their peers listed in the US and European markets overnight.

Technology stocks tend to do well in an environment of lower bond yields as it reduces the cost of capital used by analysts in their valuation models and therefore boosts such companies’ valuations. Further, in periods of lower bond yields such as 2020-2021, investors are more benign to the idea of receiving profits on their investment far out in the future.

High growth stocks tend to perform well when investors expect government bond yields to remain low as was seen in 2020-2021.

Government bond yields tanked in the UK, Europe and the US on September 28 after Bank of England said it will be buying bonds in the market to stem an evolving systemic risk caused by the sharp erosion in prices of UK government bonds over the past few sessions.

UK 10-year government bond yield soared to its highest level in 14 years on Tuesday in reaction to the government’s large tax cuts that will be financed through more debt. Investors were concerned that in a period of multi-decade high inflation such tax cuts could further stoke inflation .

However, with the Bank of England intervening to buy bonds investors are placing similar hopes of a change in tact from the US Federal Reserve given the stress being caused in the global financial system from the persistent strength in the US dollar.