Morning Notes — Recipe for Higher Yields

Positioning in Tech is overcrowded, particularly after SNAP’s blowout results last week drove incremental interest in mega-cap names given broad Q2 earnings trends and recent rally in Treasuries.  US mega-cap Tech stocks are considered lower-risk, long-duration assets and are positively correlated with long-duration bond prices (negative correlation with bond yields).  AAPL, GOOGL and MSFT all posted blowout results last night, but crowded positioning dynamics will make incremental near-term upside challenging. Higher bond prices/lower bond yields would be a tailwind, but 10-year Treasury prices are now at overbought extremes.  Owning long-duration assets acts like a warm, comfortable blanket when bond yields are declining, but acts as an anchor when nominal yields rise.  The real challenge for long-duration assets and Tech more broadly comes when real yields (nominal yields – inflation) rise and expensive multiples rerate. Higher nominal yields would follow evidence the recovery is durable and sustainable.  Given the current environment, that evidence would come from labor market data, especially higher than expected Nonfarm payrolls.  The recipe for lower inflation expectations follows the Fed messaging on transitory short-term inflation, but includes an intermediate reflation tilt.