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The yield on bonds has surged, and they will continue to rise. Stock prices are being pressured downward because of this, but not all sectors are under attack.
In addition to financial stocks and energy companies, manufacturers also seem like solid bets as yields rise.
Ten-year Treasury yields rose to 1.5% Monday after trading for 1.31% last week. As a result of the Federal Reserve trimming its bond purchases soon, bond demand may decrease, bond prices may fall, and bond yields may rise.
It is not currently expected that the Fed's taper will damage economic growth -- and the fact that it is more likely to raise short-term interest rates in 2022.
All of this has enabled the 10-year yield to rise, reflecting a more optimistic view on future economic growth and inflation. Yields may hit 1.7% in the near future. Chris Senyek, chief investment strategist at Wolfe Research, writes that it was 1.7% in May, right before the market started pricing in the slower economic growth brought about by the spread of the Covid-19 Delta variant.
Secondly, the yield inched up to 1.75% in March. The St. Louis Fed data shows long-term inflation expectations well above 2%, so it's more than plausible for the yield to revisit that high level.
An increase in this kind of stock price would benefit the most cyclical stocks or those most susceptible to changes in the perceived economic outlook in the short term.
In the S&P 500, financials are most correlated with bond yields over the long term. The financial sector comprises a large portion of banks. It becomes profitable for banks when they can lend at higher rates and still borrow at low rates when the interest rate differential between long- and short-term increases. A strong economy also means banks will be able to make more loans. According to Wolfe Research, the financials sector has had the strongest correlation of any sector on the S&P 500 since 2010.
Thanks for Reading!
Shubham Agarwal (CFA L2 Candidate | MBA candidate at University of Cambridge, UK)
Want to discuss this further or have questions regarding finance/strategy? Feel free to connect here - https://www.linkedin.com/in/shubhamagarwal13/
