June 22, 2021
Value: Yesterday’s backup in bond yields resulted in value (SVX) outperforming growth (SGX) by 99bps. Conditions for a systematic reversal in yields started about 7 days ago when the 10-year Treasury price put/call ratio reached extreme overbought levels. We stay positively biased to value sectors led by a rebound in bond yields, but the shape of the yield curve has a much larger influence on value sector performance than nominal Treasury yields. The month-long decline in bond yields took the 10-year to strong secondary support at ~1.45% and took the 5/30 yield curve to similarly strong support at ~120bps. Both have rebounded this week to ~1.48% and ~124.5bps.
Growth: Tech sector performance and real yields are negatively correlated. Real yields are nominal yields minus the rate of inflation. Higher real yields would result from a combination of lower inflation expectations and higher nominal yields. Evidence of transitory inflation in the weeks/months ahead and continued strong economic growth could result in higher real yields and renewed rotation out of Tech.
US consumer: High frequency card (credit and debit) spending data for March/April increased +9% year-over-year, May card spending increased +12% and June is running at a +14.4% pace thus far. March and April data included government assistance that seamlessly handed off to a recovery that continues to be underestimated. Consider that CA and NY lifted restrictions just last week. Those two economies make up ~22.5% of US GDP. Lockdown was an event, but reopening is a process that still feels like early innings in the consumer recovery. Yesterday, we mentioned that 26 states have decided to end federal unemployment benefits ahead of the September expiration. The transition from government assistance to work (last month’s record number of US job openings) will likely accelerate the recovery as decreased unemployment means increased wages and liquidity.