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| Wall Street. © AFP=News1 |
Wall Street strategists told investors that they should be prepared for a rise in US Treasury yields (interest rates), but they need not be afraid.
According to the US economic media CNBC on the 9th (local time), strategists compared interest rates to rising due to the expected inflation, but this is not a fire in a house, but a smoke from a frying pan.
“It’s not the absolute level of interest rates that you need to pay attention to, it’s the rate at which interest rates rise,” said Julian Emanuel, senior equity and derivatives strategist at BTIG.
Investors proposed a reflation deal as a countermeasure for inflation and investing in value stocks when the yield on government bonds rises.
◇ Treasury yield on the uptrend: The most representative interest rate is the U.S. Treasury’s 10-year Treasury yield, which affects other loans such as home mortgage loans.
Strategists predict that the 10-year Treasury bond yield, which reached 1.16%, the highest since March last year, will rise to 1.25% sooner or later. This means government bond prices will fall.
When the price of government bonds decreases, investors move to the bond market to buy government bonds, so the stock price, a risky asset, tends to decline.
In addition, a rise in loan interest rates may negatively affect the stock price, as the cost of financing increases and investment contracts, causing an economic slowdown.
◇ Reasons for the increase in government bond yield: Bond experts believe government bond yields are on the rise, and there are several reasons for this.
The biggest factor is the $900 billion corona economic stimulus bill approved in December last year and the Biden administration’s $1.9 trillion additional stimulus bill currently being deliberated by Congress.
This is to boost the economy that has been stagnant due to Corona 19, but it is potentially causing debt growth and inflation, so government bond yields rise.
Strategist Emanuel said he was concerned about a rise in 10-year Treasury yields, and predicted that it would reach 1.7% by the end of this year.
According to him, if the treasury bond yield rises too quickly and reaches the 1.34% level this month, it is likely to press the stock price.
Strategist Emanuel said, “In this case, the stock price may be blocked from rising and the investment could be shifted away from high-risk growth stocks to value stocks centered on undervalued high-end stocks.”
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| New York Stock Exchange (NYSE). ©AFP=News1 |
◇ Treasury bond yield versus stock dividend: Strategists say Treasury yields rise, but they are far from competing with equity investments.
Rory Calvassina, head of RBC’s US Equity Strategy Office, said, “In the past, government bond yields haven’t risen to a level that negatively affects stocks,” he said.
He explained that in the Standard & Poor’s (S&P) 500 index, the number of companies paying dividends above 10-year Treasury bond yields was 63% at the beginning of the year, and then 56%.
“If that ratio goes down to 20-30%, the stock market could start to struggle at this level,” said Calvasina.
◇ Inflation measures: Inflation expectations are rising, but still low. Investors are betting that inflation will average 2.2% over the next 10 years
As government bond yields rise and inflation expectations rise, investors should stick to the reflation deal, Mr. Calvasina said.
Reflation trading is a trading strategy that seeks returns by investing in stocks that benefit from monetary expansion or fiscal stimulus policies. This includes airlines, finance, and industry.
Kalbasina explained that technology stocks and telecom stocks tend to be sluggish when inflation expectations rise, while raw materials and financial stocks are booming.
Jonathan Golub Credit, Chief Strategist (CES) for Switzerland’s U.S. subsidiary, advised that a rise in Treasury yields might not hurt technology stocks a lot, but in such an environment, you should buy stocks on the junk list.
He emphasized that the increase in government bond yields could be positive for the market as it also means that the economy is healthy. In addition, it suggested that the stocks that benefit most from the strong economic economy are circular stocks (stocks that rise with the economic upturn such as housing construction, automobiles, and paper industry).
“The most stimulating event in Earth’s history will be the resumption of the economy this summer, not the end of World War II,” CES Golub added.