Bond yields set to rise, Credit Suisse says

The US central bank´s 'dovishness' led to a "dramatic" decoupling between bond yields and cyclicals over the past two months, with the former falling even as the latter outperformed, but investors would be best advised to follow the latter, Credit Suisse said.

Several relative valuation measures for cyclicals led the Swiss broker to the above conclusion.

For one, cyclicals were 0.5 standard deviations cheap relative to defensive issues, Andrew Garthwaite said in a research note sent to clients.

On the other side of the equation, oil prices had rocketed by about 55% from their lows but US 10-year US Treasury note yields had fallen by 20 basis points.

"A rise in oil price of this magnitude has never historically been associated with a fall in bond yields," Garthwaite said.

Furthermore, yields often rose in the three to six weeks after the start or accelration of quantitative easing, he added.

By sectors, Garthwaite recommended selling "expensive" bond proxies, such as Danone, Henkel and Pennon and to buy the beneficiaries of any rise in yields, banks in particular.

In the case of Europe those had "de-coupled" from 'macro-momentum´ to an extraordinary degree, he observed.

Safer plays in composites/life insurers also tended to outperform alongside rising yields, especially those with significant US exposure such as Prudential and Aegon.

"Earnings momentum, dividend momentum and yield relatives all look attractive (AXA and L&G)," the strategist added.

However, while Credit Suisse said it was sticking to its overweight on European domestic demand-related cyclicals, it was also "more cautious" on US cyclicals as they appeared relatively expensive and US lead indicators had been weaker than those in Europe.