Stock sectors have fluctuated in the past month by more than what is implied by their historical relationship with rates, suggesting the market is pricing in another 15 to 25 basis point gain in 10-year yields, UBS Group AG strategists led by Keith Parker wrote in a note last week.
All this is causing headaches for some of Wall Street’s hottest products.
Cathie Wood’s flagship ETF at Ark Investment Management was one of the best performing funds in the U.S. in 2020. But the ARK Innovation ETF, ticker ARKK, is down 20% from a February peak after being caught up in the fallout of rocketing rates.
Risky Business
Sensitivity to rates has been elevated in credit, too. Duration in the $43.5 billion iShares iBoxx $ Investment Grade Corporate Bond ETF (ticker LQD) climbed to a record 10.3 years later last year, according to data compiled by Bloomberg. It’s fallen to 9.7 years now, with the fund slumping around 6.5% this year amid the Treasury yield surge.
Meanwhile in currency markets, commodity-exposed nations including Mexico, Australia and Canada have been in the line of fire thanks to bonds, according to BofA. “The rate rise has contributed materially to a synchronized, risk-off environment across rates, equities, and FX,” strategists wrote in a Thursday note.
A JPMorgan Chase & Co. index of EM currencies has dropped nearly 3% from a one-year high reached last month.
Morgan Stanley, for its part, is bearish on emerging-market currencies on expectations that few central banks will raise rates fast enough to counteract the effects of rising U.S. yields, strategists led by James Lord wrote.
That would mark a break from the past year, when those exchange rates caught a break from a depreciating dollar as risk appetite recovered.
The silver lining in all this? Investing strategies that ride the business cycle are picking up the slack. A long-short value strategy, for example, is set for its best quarter since 2001, a Bloomberg index shows.
“As long as bond yields are moving higher, value has a chance to perform,” JPMorgan strategists led by Mislav Matejka wrote in a note.
—With assistance from Sam Potter.
This article was provided by Bloomberg News.