February 4, 2021
Yesterday, the 5-year/30-year yield spread cleared technical resistance at ~143bps on rising expectations for Democrats to use the budget reconciliation process in order to ‘go big’ on fiscal stimulus. The apparent push for another ~1.5T+ fiscal package is happening despite stronger-than-expected US economic data, Q4 earnings growth against pre-pandemic numbers and an accelerating vaccine rollout (temporary weather delay) into an already decelerating US infection rate. Our pro-cyclical equity bias started as real yields bottomed in mid-September, just two weeks after Tech multiples stopped expanding on September 2. Conviction in our call received a boost when the S&P 500 Value Index (SVX) broke through long-term pattern resistance following PFE/BNTX vaccine data on November 9. The 5-year/30-year yield spread tested technical resistance at 130bps the same day and began coiling below that level over the next three weeks. Our level of conviction received a second boost in early December when the spread sustainably widened beyond 130bps. With the spread now at 147.5bps, all roads point to relative outperformance for cyclical/value stocks, particularly Financials.