Skip links

Morning Notes — Tech and Real Yields

Tech and Real Yields

October 5, 2021

Today’s strong relief rally in Tech and Communication Services is a welcome development given their respective sector weightings within the major indices. The interest this morning was mostly driven by Hedge Funds and CTA’s after the Nasdaq 100 moved ~2 standard deviations below it’s 50-day moving average. There’s no evidence yet of fundamental long-only buyers stepping in to rebuild positions ahead of earnings.  Today’s better-than-expected September US NonManufacturing ISM is lifting 10-year breakeven yields more than nominal yields.  This implies inflation expectations may be rising faster than nominal yields, which has implications for Tech performance as we go forward. Tech multiples have a strong negative correlation to real yields (nominal yields – inflation).  If inflation expectations rise faster than nominal yields (holding other variables constant), Tech has a chance to fully recover and outperform. The market reaction to today’s Non-Manufacturing ISM beat is telling, but the real test comes Friday with the release of September non-farm payrolls.  We’ve been adding cyclical/value sector (Financials, Materials, Industrials, Energy) exposure since real yields bottomed last September.  There were other factors, but the key driver behind the call was higher 10-year real yields.  The delta-variant-driven Q2’21 decline in real yields led to a strong counter-trend rally in Tech that ended in early-August as real yields bottom for a second time. The late-August double bottom held important intermediate-term pattern support at -1.19.  Ten-year real yields currently sit at -0.89 and we still see levels above -0.87 leading to multiple contraction in Tech.  Stay tuned…  

Read more