Morning Notes — Bond Yields and Sector Dispersion

Bond yields: Yesterday’s release of the most recent Fed meeting minutes confirmed our expectations that QE purchases will conveniently match Treasury bond issuance. The four-session-long bond yield back-up and curve steepening trend paused today in an apparent acknowledgement that Fed officials have Treasury bond issuance (to pay for fiscal stimulus) baked into their QE plans. We linked the curve steepening trend to the outperformance of cyclical sectors over the past four sessions; a development we consider important for the sustainability of the recent equity rally. But what’s interesting today, is that cyclical groups continue to outperform despite the apparent shift in yield curve dynamics…something to watch in the days ahead.

SPX: The S&P 500 continues fade at technical resistance levels of ~2950 and popular CTA triggers just ahead at ~2980. If the index gets through, we see upside to ~3100, at which point the argument around markets being ‘overbought’ have statistical validity. Equities are in the process of multiple re-rating due to 0% interest rates and sub-1% bond yields. The historical framework around PE multiples that suggested a range of 12x-17x was based on a much higher discount rate in the denominator of the DCF-based valuation model