Many growth stocks, particularly in the tech sector, didn’t grow their share prices on Monday. For instance, three notable up-and-coming tech companies — Datadog (NASDAQ:DDOG), MongoDB (NASDAQ:MDB), and Okta (NASDAQ:OKTA) — all fell much harder on the day than the S&P 500 index. Their declines were related to developments in the bond market.
None of the three had significant price-moving news of their own to report, so it’s apparent that their falls (with Datadog off 3.6%, Okta down 4.7%, and MongoDB 4.9% lower) had more to do with those developments.
Specifically, yields on Treasury bonds are rising, after the Federal Reserve intimated that it will bring its asset purchasing program to a halt before long. The yield of the 10-year Treasury on Monday promptly reached its highest level since June, at over 1.5%.
Higher bond yields can negatively affect the prices of high-flying tech stocks; Datadog and MongoDB certainly qualify, while Okta hasn’t been an outperformer lately but is currently trading 14 times higher than the price set for its 2017 initial public offering.
There are numerous reasons some investors bail from such stocks when benchmark bond yields rise notably. They might be concerned that such share price growth is unsustainable and perhaps due for a significant correction, and thus are withdrawing their money in a flight to lower-risk investments.
Rising Treasury yields could also mean higher borrowing costs if they are sustained. And higher borrowing costs mean a tighter market for capital in general. Since young tech companies such as Datadog, MongoDB, and Okta frequently burn through cash and are often in need of dosh as a result, they could struggle in such an environment.
It probably isn’t time to push the panic button on Datadog, MongoDB or Okta quite yet. Yes, all three collectively post bottom-line losses far more often than profits, but they have compelling business models and are still sitting in front of big growth opportunities. That said, investors should keep an eye on macroeconomic developments and how they might impact each of the trio.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.