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Morning Notes — Bond Yields Close to Technical Breakout

Bond Yields Close to Technical Breakout

August 28, 2020

Rising bond yields have the potential to create problems for momentum sectors like Tech where positioning has become crowded.  Tech has an historical negative correlation with interest rates.  Of the major indices, the NASDAQ 100 has a strongest negative correlation with interest rates.  It’s important to recognize the difference between interest rates and bond yields.  Interest rates are heavily influenced by Fed policy and bond yields reflect market expectations of future inflation.  Tech also has an historical negative correlation to 10-year bond yields, but the coefficient is weaker.  As you know, the pandemic and associated lock down/social distancing measures have led to a more rapid adoption of ‘work from anywhere’ and other technology applications. Of course, it’s also accelerated the market concentration in Tech, which increases the downside risk from potentially higher bond yields.  Value sectors like Financials, Materials and Energy are positively correlated with higher bond yields and curve steepening.  So are cyclical groups like Industrials and Consumer Discretionary.  And with a record ~$5T currently sitting in money markets, I think there’s ample cash for investors to right size their sector allocations without using growth/Tech as a source of funds.

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