The US 10-year Treasury yield has climbed from 3.94% at the end of February to over 5% now, and UBS says the move is thinning out how many European stocks rise alongside it rather than dragging the whole market lower. The bank frames the rise as a byproduct of strengthening, broadening growth rather than an inflation scare.
The US 10-year Treasury yield has risen from 3.94% at the end of February to over 5% currently, and UBS says the increase is a headwind to valuations but not a uniform one across the market. With the real yield up from 1.68% to 2.67% over the same period, the bank's strategists said equities have absorbed the level better than the velocity.
Breadth narrows as yields climb
Since the beginning of March, weeks in which the 10-year yield rose averaged only 42% of MSCI Europe index weight rising, versus 64% in weeks when the yield fell, UBS strategists said. According to UBS: "The market is not falling on higher yields so much as narrowing under them." The firm said it is the combination of level and speed that breaks breadth.
With the 10-year below 3%, even a weekly move of more than 20 basis points saw over 57% of the index move higher, as rising yields were read as a sign of growth. However, when yields sat between 4% and 4.5%, breadth fell from 60% on down-yield weeks to 30% when yields rose more than 20 basis points. Above 4.5%, the firm said the level in isolation is benign, but a sharp weekly increase still does damage because the growth hurdle needed to hold investor attention rises with the discount rate.
Why UBS calls the rise healthy
UBS said the rise is not a term-premium accident or an inflation scare, but reflects growth that is strengthening and broadening. The firm pointed to an industrial capacity expansion cycle starting to emerge simultaneously across sectors including defence, AI equipment, infrastructure and power, calling it the first such shift in a generation. Industrial activity carries a higher velocity of money than services, the strategists said, which matters for how rates behave.
Against that backdrop, UBS strategists said they favor companies with the lowest sensitivity to rising yields, citing their cheaper valuations and more cyclical, growth-oriented earnings. The distinction, the firm said, is not cyclical versus defensive in the abstract, but whether earnings growth is accelerating fast enough off a cheap enough valuation to offset multiple compression.
Source: Investing.com
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