June 21, 2021
Last week’s apparent hawkish Fed pivot had bond prices reaching further into extreme overbought territory, but yields still held support, loosely defined at ~1.45%. The move had some investors rotating away from reflation themed equities (value, cyclical and small cap equities) in favor of growth/Tech as the Nasdaq 100 (NDX) regained leadership. To work higher, value themes like Financials, Materials and Energy need curve steepening more than they need higher yields. Last week’s bull flattening move took the 5-year/30-year yield spread (yield curve) to secondary technical support levels at ~120bps (remains there this morning). Four days of value sector weakness was confirmed in commodity and FX markets, but rotating completely out of value and into growth without more curve flattening seems premature, especially with bond prices at overbought extremes. A more aggressive curve flattening would force a rethink of our 9-month-long cyclical/value equity bias, but we’d first look for the 5/30 curve to stabilize at these levels. Commodity and FX markets should offer early clues. Once they stabilize, we’re likely to see a rotation back to value. For now, last week’ price action looks more like a position squeeze than a regime shift back to growth.