A global investor’s equities playbook for rising bond yields

Bloomberg.- It’s the question brought into focus by last week’s equity market rout, partly sparked by the recent sharp move upward in U.S. government bond yields, and reiterated Wednesday after U.S. consumer prices data pushed them higher again. As equity traders around the globe wake up to the prospect of higher inflation and interest rates — and adjust to a higher yield range — many are seeking the best trades to capitalize on movements in the bond market.

“We have clearly seen a shift in expectations on monetary policy and global rates over recent months,” said Mahmood Noorani, the founder of Quant Insight, whose past experience includes roles at BlueCrest Capital Management and Credit Suisse. “The challenge for equity investors is to identify stocks that are sensitive to these macro shifts.”

Advice is starting to trickle in. What follows represents the views of strategists and analysts on which specific companies and sectors stand to benefit — or lose out — in an environment where moves in bond yields are becoming more important for the direction of stocks.

The yield on 10-year Treasuries on Thursday climbed for a second day, holding above 2.9 percent.

Quant Insight
The firm, which uses algorithms to identify assets most sensitive to particular factors such as currencies or economic growth, has identified the following European stocks as the winners and losers from rising 5-year Treasury yields and higher U.S. rate volatility.

Strategists at RBC Capital Markets note that since the financial crisis, value stocks have outperformed when the 10-year yield is on the rise, while growth has won when yields are falling. That relationship has broken down in recent months, but may return, according to RBC’s Lori Calvasina. JPMorgan Chase and Co. and Goldman Sachs Group Inc. are among banks predicting a rebound in the value style.

Energy, materials and financials shares are positively correlated with 10-year yields and inflation expectations, suggesting they should lead in a rising rate environment, RBC says.

While equity traders are scrambling to find ways of benefiting from rising yields, HSBC strategists are looking to do the opposite. The bank is recommending that European investors consider buying equities poised to benefit from falling bond yields, based on its view that the 10-year U.S. Treasury yield will peak around the end of the first quarter and weaken to 2.3 percent by year-end.

Sectors that stand to gain from falling yields are growth shares such as luxury goods and ones with higher dividend yields like utilities and energy. HSBC has an overweight position on those in Europe, while it’s been cutting its position in financials, where it still holds a modest overweight, but says the yields environment will be a headwind.

U.K. grocer Tesco Plc is among UBS’s top single-stock picks, as it’s relatively low-beta and has historically demonstrated limited exposure to 10-year U.S. Treasury yields, the bank’s strategists wrote in a note. Overall, UBS’s wealth-management unit does not believe yields will rise to levels that will prevent equities moving higher in the next six months.

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