January 7, 2021
We turned incrementally positive on cyclically sensitive ‘value’ sectors in mid-September. Our level of conviction level increased on October 21 when 10-year Treasury yields broke through 0.79%, again on the November 9 when PFE/BNTX vaccine data exceeded expectations and again last week as the 5-year/30-year yield spread increased beyond ~130bps. The 5-year/30-year spread is 139.7bps at the moment with our next ‘conviction boost’ following a sustained widening beyond ~140bps. Our preferred cyclical/value sectors have included Financials, Materials and Industrials. Financials, specifically banks should be the hands-down beneficiary if/when the curve steepens beyond ~140bps. Regional banks are particularly attractive, still trading at 40% discount to the average market multiple vs their historic discount of just 10%. Financials are under-owned and positioning in banks is well-below average levels. Even the bravest PMs probably carry a market-weighting at best. This type of curve steepening happens 2-3 times every 10 years and most investors miss it. A steeper yield curve will lift all banks, but regionals should experience better loan growth and better reserve releases than their large cap peers.