Rising bond yields are creating a new investing landscape with rate-sensitive stocks coming into favor, Credit Suisse analysts said. The firm has a list of stocks to play in the current environment. As markets price in stronger economic growth and perhaps some inflation pressures ahead, fixed income is selling off, which causes yields to climb. Bond yields move inversely to price. In recent days, Treasury yields have hit levels not seen since before the Covid-19 pandemic. That in turn has scared stock investors, who had come to enjoy the low rates provided by the Federal Reserve that had made corporate debt cheap and supported profit margins. "Higher rates hurt equities via valuation, interest charge, growth and funds flow," Credit Suisse analyst Andrew Garthwaite and others said in a note to clients. Their recommendations are fairly typical pro-cyclical names that do well in times of rising rates and faster growth. They include some big names in Wall Street finance as well as a cruise line, an energy leader and an airline. In sector terms, Garthwaite said the firm favors banks, diversified financials and autos. Those expected to underperform include real estate, utilities and beverages, classical defensive plays that work better in low rates and slower growth. In global markets, the firm also likes ING, Lloyds, AXA, BASF and Randstad. The benchmark U.S. 10-year Treasury note most recently traded around 1.5%, after starting 2021 at 0.93%. Historically speaking, that yield remains well below the average, but it is the rapid rate of change that has caught the market's attention. Federal Reserve officials have vowed to keep rates low until the economy has achieved a more complete recovery, but a turbulent market could pose problems for the central bank. The Credit Suisse analysts said they don't think yields will become a problem until the 10-year hits 2%, which matches the Fed's inflation target. Generally, markets can handle a rise of up to 130 basis points before reacting negatively, the note said. One basis point is equal to 0.01%. The current forecast is a potential rise to 1.8% to 2%, with longer-term inflation expectations hitting 2.5% to 3%, a move that likely would cause the Fed to start tightening. "We don't see rising inflation expectations as a problem until the Fed meets its target (probably around core CPI of [about] 2.8%) and historically equities have not de-rated until inflation is above 3%," the firm said, referring to the consumer price index. "The key driver of multiples in the past 5 years has been the TIPS yield (prior to that it was not)." An inflation risk the note cites is faster than expected growth. The market currently sees gross domestic product rising about 5%, but that could hit 7% to 8% this year thanks to continuing government stimulus, Credit Suisse said.
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Rising bond yields are creating a new investing landscape with rate-sensitive stocks coming into favor, Credit Suisse analysts said.
The firm has a list of stocks to play in the current environment.