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Treasury yields are on a tear.
The 10-year Treasury yield hit 1.18% on Tuesday, continuing its strong start through 2021 and reaching its highest levels since end of March Last year. However the yields closed flat following high demand at auction of $ 38 billion of new 10-year notes midday.
“This move was a pretty decent move in a fairly short period of time, and I think a lot of it really ties into the election results,” said Charlie Ripley, senior investment strategist at Allianz Investment Management. Fortune, referring to the two ballots in Georgia. It’s based on the hope that a slim Democratic majority in Congress will lead to more stimuli in the coming months, which “really pushes yields up on the Treasury curve,” he notes.
Some strategists believe that “we might see more of the same over the rest of 2021” when it comes to rising yields, LPL’s Ryan Detrick wrote in a note Tuesday, as LPL’s financial analysts expect. what the 10 year remains between 1.25% and 1.75. % range by year-end, “supported by continued economic improvement and a manageable recovery in inflation,” they wrote. (At around 1%, however, LPL analysts noted, returns “would have been [at] a record level ”before 2020.)
With the latest surge, some on the streets are keeping an eye on the performance path against the stock market. Ripley from Allianz notes that “in an environment where rates are coming from a low base, there is just a little more sensitivity around interest rates… We might see a bit of resistance in the stock markets from this point. of view if rates continue to rise. the levels at which they are, ”he argues.
Indeed, stocks sold on Monday and were relatively stable on Tuesday, with the S&P 500 up 0.04% and the Dow up 0.2% at the close as stock markets tried to “digest” higher yields, suggests Ripley.
So how should investors view these yield movements?
“At the top, [higher Treasury yields] won’t really be an alternative, so they won’t necessarily derail the race that we see in stocks, ” Wells fargo Sameer Samana of the Investment Institute says Fortune. “Where they will have an impact is sort of below the surface at the sector and industry group level. They will cause a rotation, [and] we’ve already started to see a bit of that, ”in cyclical areas like finance, materials and discretion, he notes.
For income investors, even if the 10-year yield reaches 1.5% (Samana’s 2021 target), “rates are not really holding the candle to stocks,” he says. At 1.5%, “the 10 years [would] really just equal to S&P [500] dividend yield, and we think this year’s dividends still have room to increase. ”
Meanwhile, many strategists doubt that yields will maintain the pace we saw in the first week of 2021, and Ripley believes the Fed will “stay the course” on rate hikes.
Mark Haefele, chief investment officer at UBS Global Wealth Management, wrote in a note on Tuesday that while “the potential for fiscal stimulus justifies slightly higher yields from the U.S. Treasury, as well as a normalization of economic activity as vaccine deployment is accelerating, ”he does not. I don’t expect the “surge in yields to go much further.” That’s because he expects inflation pressures to remain “subdued,” adding that the Fed will tolerate even higher inflation (as it has indicated), while the increase in the debt is unlikely to be a factor in higher yields.
For now, Wells Fargo’s Samana has a few pointers for investors watching returns: He suggests that “now is not the time. [for] long term bonds ”in your fixed income portfolio and recommends shifting“ some of the fixed income money to stocks, ”especially cyclicals.
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