April 16, 2021
Bond yields: Ten-year Treasury yields declined by 11bps at one point yesterday (closed 6bps lower), despite much stronger-than-expected US data. Short-covering is the most logical explanation after foreign investors sold >$65B in long-dated Treasuries during February. This counter-cyclical move has the potential to continue a bit longer as yesterday price advance probably shifted short-term momentum signals often used by systematic funds. At 1.58%, ten-year yields are currently below first level support in the 1.62%-1.64% range, which puts much stronger secondary support at ~1.45% into view.
Cyclical/value: We use higher bond yields and curve steepening as a guide for cyclical value equity outperformance, but the strong recovery in global PMI data is really the primary driver. The pandemic forced the PMI pendulum well below the contraction/expansion line of 50. Massive policy stimulus was added, vaccines were developed and the short-cycle pendulum has now swung meaningfully into expansion mode. At the moment, we only know the acceleration has economies competing over a fixed set of commodities. We’ll continue to use bond yields as our guide with ~1.45% serving as the best place to add meaningful cyclical/value equity exposure.