Morning Notes — The Yield Curve and Value Sectors

Bond yields reflect market expectations of future rates of inflation or growth.  Higher future bond yields tend to lead cyclical equity sector (Industrials, Financials, Materials, Energy) outperformance.  But higher future yields are measured by the slope of the yield curve. An easy/effective yield curve proxy is the difference between 5-year yields and 30-year yields (5/30 spread).  Yesterday’s more hawkish FOMC outcome saw 5-year yields rise 11.5bps, while 30-year yields rose only 2.1bps. The result was a flattening of the 5/30 yield curve to 131bps from 141bps.  First line technical support for the 5/30 spread is ~130bps.  The curve has flattened further this morning to secondary support at ~121bps, but closing levels matter more.  Value sectors will be OUT of favor if the US Treasury yield curve moves to a flatter regime. Powell’s House testimony next Tuesday and June flash PMIs on Wednesday are the next major catalysts for bond yields.

Value: At yesterday’s close, the S&P 500 Value Index (SVX) had consolidated gains to its upwardly-trending 50-day moving average at ~1458.  It’s currently below that level intraday, but the close matters most.