Credit Suisse told clients U.S. and German interest rates may jump in the next year so they should buy bank stocks and sell "bond proxies" like consumer staples.
"We see a risk that bond yields rise more than expected," global equity strategist Andrew Garthwaite wrote in a note to clients Thursday.
"Normally, cyclicals outperform when bond yields rise, but U.S. cyclicals already seem to be pricing in a 2.4 percent U.S. 10-year yield; valuations are expensive in the U.S. ... Hence, we prefer to play rising yields through financials."
He cited the firm's forecast of a 2.15 percent 10-year Treasury yield by the end of 2017 versus 1.82 percent Thursday morning. But he added "it would not surprise us to see it above 2.25 percent."
Garthwaite, a perennial top equity strategist according to Institutional Investor noted multiple factors in his upside case for yields.
First, global policymakers seem to be moving toward fiscal easing instead of low interest rate monetary policies. In addition, China isn't currently exporting deflation for the first time in 2 ½ years. And finally, the rise of populism "tends to be bad for bonds" as trade protectionism increases prices, according to the strategist.
On the flip side, a rising yield environment will also have negative implications for certain sectors.
"We stay underweight consumer staples (ex tobacco): earnings revisions are rolling over sharply ... and they are the most sensitive sector to rising inflation and yields," Garthwaite said.
"We remain underweight U.S. and European regulated utilities. To us, this sector is a disrupted bond proxy facing greater-than-realized regulatory risk."
To take advantage of the call, here are eight "outperform-rated" financials ideas from the Credit Suisse report.
