Jefferies has named the best stocks to own during rising U.S. 10-year Treasury yields . Stagflation and recession fears have grown in recent weeks amid a string of troubling macro events, including the Fed's first interest rate hike since 2018 , conflict in Europe and surging energy prices. U.S. five-year and 30-year Treasury yields also inverted for the first time since 2006 on Monday, while on Thursday, the two-year and 10-year yields did so for the first time since 2019. Such yield curve inversions are traditionally recession harbingers. Best stocks to own Against this backdrop, Jefferies Global Head of MicroStrategy Desh Peramunetilleke outlined the "best global stocks to own during rising US 10Y bond yield." He believes financials — especially banks — are best placed to outperform during periods of rising nominal and real yields, according to a research note published Mar. 31. Cyclical sectors — which fluctuate alongside economic cycles — are also likely to do well, Peramunetilleke added. In the U.S., the bank's top picks in the financials space are Charles Schwab , Comerica , JPMorgan Chase and Morgan Stanley . Other picks favored by the bank include ConocoPhillips , Exxon Mobil , Deere & Co and Caterpillar . Jefferies also likes European banks UBS , Barclays , Credit Agricole and Deutsche Bank . The bank's screen also turned up several European energy stocks, such as Norway's Equinor , Spain's Repsol and Luxembourg-based Tenaris , a manufacturer of steel pipes for the energy industry. Within the Asia-Pacific region, Jefferies' favorite banking stocks are HSBC , China Merchants Bank , National Australia Bank and Singapore's DBS Group , as well as mining giants BHP and Rio Tinto . What next for stocks? U.S. stocks have remained resilient despite the market volatility over recent weeks. After slipping into correction territory earlier this year, the S & P 500 has staged a rebound over the past month, rising more than 3%, as the market shrugged off the prospect of further and sharper rate hikes. Read more Now that the key yield curve has inverted, here's what typically happens to stocks next Gundlach warns don’t believe the people who say the yield curve doesn’t matter Despite this bounce back, U.S. stocks could again witness volatility as momentum for a sharper rate hike builds, Peramunetilleke added. "While the Ukraine-Russia war continues to dominate the headlines, an even bigger worry for equities in 2Q22 is that the Fed tightens too aggressively upfront (rates and QT [quantitative tightening]) to counter inflation, leading to a sharp slowdown in economic activity in the 2H22," he said. "Usually, an economic slowdown should drive value underperformance, but given the PE derating [price-earnings ratio] risk of US growth names amid the rising discount rate and with inflation and higher rates supporting commodities and financials, the path of least resistance seems to favour value."
The S&P 500 rose more than 5% in March, despite a challenging macro backdrop. But Jefferies thinks there could be more volatility ahead, and has a raft of stock picks to play it.
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