Morning Notes — Bond Yields Testing Resistance

At 1.33%, 10-year Treasury yields are currently testing secondary technical resistance in the 1.30-1.35% range.  We’re not expecting a breakthrough in the near-term, but wouldn’t be surprised given vaccine headlines and policy rhetoric.  To be clear, our expectation for higher yields is based on a cyclical recovery, rather than near-term inflation data.  The next piece of US inflation data will be January PCE due next Friday. This is the Fed’s preferred inflation measure and we expect the data to cool inflation expectations/help keep yields from releasing higher.  Fed Chair Powell could also interrupt the bond yield backup when he testifies before Congress next Tuesday and Wednesday.  His prepared remarks should be a non-event, but it’s possible the Q&A could reopen the conversation about changing the duration of asset purchases (buying more long duration bonds could cap the recent yield backup).

Yield curve: At 154.9bps, the 5-year/30-year Treasury yield spread is also testing the upper end of technical resistance at ~155bps. Our preference to add cyclical/value equity exposure is based on a 5/30 year spread above ~130bps.  Expect the 5/30 spread to eventually break above 155bps, but not immediately. Financials clearly benefit from curve steepening and the current slope should continue to benefit this under-owned sector.

Rotation: Recent rotation out of Consumer Staples and into Materials, Financials and Energy will likely continue unless 10-year bond yields break below 0.95%-1.00%.  We see little chance of that happening given credible reports on the potential for US herd immunity by April/May, ongoing monetary stimulus, fiscal stimulus already in the pipeline and an inexplicable push to add another $1.9T in additional stimulus. Expect high multiple stocks (Tech) to rerate lower if 10-year yields rise beyond ~1.45% in the near term.