Inside Markets — Bond Duration

Last week, 10-year bond yields pulled back from technical resistance near 4.35%. Now at ~4.25%, we see scope for 10-year yields to break to the mid 3.90’s where they will likely consolidate gains as markets assess growth and inflation data into an assumed June Fed rate cut. The outlook for bond yields should be a tailwind for equity markets.

The SPX rally started to broaden out last week to include cyclically-sensitive groups, while momentum baskets paused. The cyclically-sensitive Russell 2000 (RTY) had a good week but stopped short of breaking above long-standing range resistance at ~2100. A break above ~2100 would likely precede the start of a global manufacturing cycle, broader rally participation and a sustained shift in leadership toward cyclical sectors. But outperformance in cyclical SPX sectors without an upside breakout in the RTY suggests here the move will be short-lived. We remain open to an upside break in the RTY, which would likely be the start of a dramatic catch up trade in small cap stocks following a prolonged period of underperformance. But we see that as a low-probability event given the still-inverted yield curve and highly restrictive real yields.