What happened
Shares of MercadoLibre (MELI 1.07%) fell today even though there was no news out on the Latin American e-commerce company. Instead, it was one of a number of high-growth stocks that pulled back sharply today as investors were spooked by fears of rising Treasury yields, which entice investors away from growth stocks and into other options like bonds.
MercadoLibre stock finished the day down 5.4% while the 10-year Treasury yield rose 1.6% to 1.48%.
Image source: MercadoLibre
So what
All other things being equal, rising Treasury yields tend to be bad for the stock market as they make bonds more appealing to investors because of the higher yields. This also means that earnings valuations are likely to fall as interest rates rise. Comments from the Federal Reserve about tapering its bond-buying programs, which keeps interest rates artificially low, and higher inflation seem to be pushing Treasury yields higher.
Growth stocks like MercadoLibre are especially sensitive to this relationship because their expected earnings are further into the future. As interest rates rise, so do discount rates, which are a key component of the discounted cash flow model, meaning those earnings are worth less.
With a price-to-earnings ratio well into the triple digits, it's clear why MercadoLibre is one of the stocks getting hit by the sell-off.
Now what
Rising Treasury yields and the pullback today aren't good reasons to sell a stock like MercadoLibre, as they have no impact on the company's fundamentals. In its most recent earnings report, revenue doubled in currency-neutral terms and the company is building momentum in financial payments, staking out a leadership position in digital payments in Latin America.
Those factors are more important than what happens with Treasury yields, but investors might want to keep one eye on interest rates as that could continue to have an impact on the stock.
