By Yasin Ebrahim
Investing.com – The S&P 500 ended flat Thursday as tech was lifted by falling bond yields but gains for the broader market were kept in check by falling cyclical stocks following the Federal Reserve's hawkish turn a day earlier.
The S&P 500 fell 0.06%. The Dow Jones Industrial Average was down 0.62%, or 210 points, and the Nasdaq Composite was up 0.87%.
The move lower in Treasury yields suggests that we're on a path to lower growth at a time when the Fed's view that inflation is transitory gains in popularity, creating the perfect cocktail for tech as investors look to quench their thirst for growth.
The fall in 10-year break-evens is giving tech "somewhat of a green light if indeed the Fed is correct on inflation being 'transitory,' just as the long end of the curve implies a low-growth environment ahead (effectively making growth scarce)," Mark Luschini, chief investment strategy at Janney Montgomery Scott.
Others, however, offer a more simple explanation for the fall in yields: falling supply.
"The supply side of treasuries has come down," said Aptus Capital Advisors portfolio manager David Wagner said in an interview with Investing.com on Thursday. During the pandemic, the limit on the debt ceiling - how much money the U.S. government can borrow - was lifted, but it is set to be reimposed on July 31.
Ahead of the deadline, the government is using the cash on its balance sheet, or Treasury General Account, rather than selling of bonds to raise cash for spending. Against this lower supply, the Fed continues to buy bonds, pushing prices higher, and yields lower.
"They're (the government) not issuing as much treasuries as before, yet the Fed is still purchasing $80 billion worth of treasuries every single month, and they're still seeing an increased demand from Europe," Wagner added. "When demand rises and supply declines, you're going to see yields compress, and that's what has been happening right now."
Tech, however, a big fan of falling yields, didn't seem to care about whether the move in rates will be transitory.
Apart from Google-parent Alphabet (NASDAQ:GOOGL), Microsoft (NASDAQ:MSFT), Apple (NASDAQ:AAPL), Amazon.com (NASDAQ:AMZN) and Facebook (NASDAQ:FB) were more than 1% higher.
The semiconductor stocks also bolstered the wider tech sector, with Nvidia (NASDAQ:NVDA) and Advanced Micro Devices (NASDAQ:AMD) sharply higher.
Cyclicals, meanwhile, struggled as the rotation from value to growth appears to be in vogue once again.
Financials were dragged down by banks as lower yields hurt net interest margin.
JPMorgan (NYSE:JPM), Goldman Sachs (NYSE:GS), and Bank of America Corp (NYSE:BAC) were down sharply, with the latter down 4%.
Lower interest rates hurt the return on interest that banks earn from their loan products, or net interest margin – the difference between the interest income generated by banks and the amount of interest paid out to their depositors.
When rates do move higher, however, cyclicals – those sectors of the market that move in tandem with the economy - will be the place to be.
"At the beginning portion of this year, the type of securities that outperformed when you had a high velocity increase in real rates was the high beta cyclical names. Whether the market goes up or down, I think that there's a longer runway for stock appreciation in the more cyclical areas of the market rather than the defensives," Wagner said.
In other news, Honest Company (NASDAQ:HNST) ended 7% lower after its maiden earnings report fell short of market expectations.