More tech pain? The surge in interest rates led to a correction in tech stocks

$Nasdaq Composite Index (.IXIC.US)$ suffered its worst start to the year since 2016, falling more than 3% on the first day of trading. Despite the recent back-to-back rallies, they are still down nearly 3%.

Unprofitable tech companies and those that have recently gone public have fallen even more. Unprofitable technology companies have fallen 7% so far this year, while those less than a year public have fallen 9%, according to Goldman Sachs.

Meanwhile, US real interest rates continue to rise. Inflation-linked 10-year Treasury yields have surged 0.24 per cent since December to -0.86%. Real US interest rates have risen more this year than the yield on the average Treasury bond, with the gap falling from 2.60 per cent to 2.58 per cent.

Research by Jim Reid, an analyst at Deutsche Bank, shows that corporate credit spreads - the extra yield investors demand companies pay compared with the US government - have become increasingly correlated with real interest rates in recent years, and tend to widen when real rates rise.

That would put a lot of pressure on highly indebted companies and call into question the sustainability of their debt burdens.

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