Nasdaq set for steep fall as surging bond yields hammer tech shares

© Reuters. FILE PHOTO: A street sign is seen in front of the New York Stock Exchange on Wall Street in New York, February 10, 2009. REUTERS/Eric Thayer/File Photo

By Devik Jain and Sruthi Shankar

(Reuters) -The Nasdaq was set to fall the most among Wall Street indexes on Tuesday as technology heavyweights came under pressure from a surge in bond yields on expectations of higher interest rates and rising inflation.

The two-year U.S. Treasury yield surged to 18-month highs, weighing on shares of high-growth companies whose values are closely linked to future earnings. [US/]

Shares of Google-parent Alphabet (NASDAQ:GOOGL) Inc, Microsoft Corp (NASDAQ:MSFT), Amazon.com Inc (NASDAQ:AMZN), Apple (NASDAQ:AAPL), Tesla (NASDAQ:TSLA) Inc and Facebook Inc (NASDAQ:FB) dropped about 1.5% in premarket trading, and were set to drag on the Nasdaq and the S&P 500 for the second straight day.

These stocks have benefited from the low-interest rate environment since the start of the pandemic. [US/]

The blue-chip Dow outperformed on Monday as investors pivoted into sectors that stand to gain the most from an economic revival.

The S&P energy sector has gained nearly 10.4% so far in September, and is on track to break a two-month losing streak.

"I don't think this is the reflation trade. This is simply the Fed moved the needle a very small amount on interest rates, and value versus growth reacted because of that," said Jason Pride, chief investment officer for private wealth at Glenmede.

The higher prices and hiring difficulties seen as the U.S. economy reopens from the pandemic could prove "more enduring than anticipated," Fed Chair Jerome Powell said in prepared remarks ahead of his hearing before the U.S. Senate Banking Committee.

A host of other Fed officials including St. Louis Fed President James Bullard, Fed Bank of Chicago President Charles Evans and Fed Bank of Atlanta President Raphael Bostic are also slated to speak later in the day at separate events.

Market participants are waiting for data on consumer confidence, inflation and ISM manufacturing activity this week to gauge the pace of recovery.

Progress on U.S government funding negotiations was also in focus after sharply divided U.S. Senate failed on Monday to advance a measure to suspend the federal debt ceiling and avoid a partial government shutdown ahead of a Sept. 30 deadline.

"Up until now, it's just seen as posturing and the way politics work within (the United States). Past that deadline and the closer it gets to the third week of October, I would expect the market to care more and actually react volatility-wise to that," Pride said.

The shift out of technology names was triggered after the Fed last week signaled it could tighten its accommodative monetary policies in the months ahead amid signs of recovery in the world's largest economy.

After largely underperforming its growth counterpart so far this year, the Russell 1000 value index has narrowed the gap in September, and is now up 17.3%.

At 8:33 a.m. ET, Dow e-minis were down 133 points, or 0.38%, S&P 500 e-minis were down 34.25 points, or 0.77%, and Nasdaq 100 e-minis were down 223.25 points, or 1.47%.

Ford Motor (NYSE:F) Co rose 4% after the U.S. automaker and its Korean battery partner SK Innovation said they would invest $11.4 billion to build an electric F-150 assembly plant and three battery plants in the United States.