Morning Notes — Here Now

Ten year Treasury yields are presently testing secondary technical resistance at ~1.16%.  Treasury prices are now short-term oversold and odds favor a bounce, meaning yields should fade from these levels.  We’ve been making the case for higher yields since mid-September with corresponding outperformance in cyclical/value equity sectors.  Ten-year yields above ~1.16% shouldn’t become a broad market headwind, but the move to technical resistance is already weighing on the relative performance of bond proxies like Utilities, Communication Services and REITs.  Since mid-September, the S&P 500 Value Index (SVX) has outperformed the S&P 500 Growth Index (SGX) by 541bps with the most acute phase of relative outperformance coming over the last six sessions. Ultimately, we expect higher bond yields and more curve steepening will further benefit cycle/value stocks, but look for near-term pause in relative outperformance if yields fade from current levels.  Biden’s economic plan with increased fiscal spending “in the trillions” shouldn’t surprise anyone on Thursday.  The next catalyst for yields and the cycle/value trade will probably be JNJ Phase 3 vaccine data and NVAX UK Phase 3 data due any day.  In the short-term, markets could even interpret positive vaccine data (efficacy >70% and clean safety profile) as reducing the need for increased fiscal spending.