Rolling 5-year correlation of style vs. 10-year Treasury yield
Source: Bloomberg Finance, L.P., FS Investments, as of July 30, 2021. Value represented by the MSCI USA Value Index. Growth represented by the MSCI USA Growth Index.
- The 10-year U.S. Treasury yield again declined this week as investors grew anxious about a potential deceleration in U.S. economic growth amid rising COVID-19 case counts along with renewed discussion surrounding the timing of the Fed tapering its monthly bond-buying program.
- Swift changes in long-term interest rates have had obvious and significant impacts on core fixed income returns this year and over the past several years.
- Perhaps less obvious to many investors is the increasingly stark relationship between equity market performance and interest rates.
- Specifically, the correlation of value stocks to 10-year Treasury yields has increased while growth stocks have moved in the opposite direction.1 Said another way, value stocks have outperformed when long-term yields rise while growth stocks — including the technology stocks that have driven much of the post-COVID market recovery — have rallied as rates decline.1
- While rate activity this year has been somewhat unpredictable, from the sharp and extended spike in Q1 to rates’ subsequent decline despite increased inflationary pressures, the forward-looking environment also appears murky. Major Wall Street banks’ forecasts for the 10-year yield cast a wide net, ranging anywhere between 1% and 2% for the end of this year.2
- Against this backdrop, investors need to be mindful of duration risk across their portfolios. Taking a balanced style-agnostic approach may be more important than ever to capture returns in rapidly changing markets.
