Morning Notes — Nominal Yields Reach Support

Real yields: Higher commodity prices are driving inflation breakeven yields higher, while risk-off positioning pressures nominal yields lower.  The combination has taken 10-year real yields to -0.95%, which is back below the -0.89 trigger we used to signal the potential for multiple compression in expensive Tech stocks during Q4’21.  That was the right theme as 10-year real yields crossed above -0.89 on January 4 and Tech underperformed and the broad software universe extended into bear market territory.  Current 10-year real yield levels below -0.89 may present a tactical opportunity for Tech to outperform, but stay cautious as nominal yields reach support.

Nominal yields: Elevated market volatility, risk-off positioning, low liquidity and higher commodity prices have pushed 10-year Treasury yields to support levels in the 1.69-1.75% range.  A shallow break to 1.61-1.63% is possible, but we look to a break above cycle highs of ~2.05% in the months ahead and keep a ~2.30% target in early H2’22.