Bond arithmetic suggests losses lower than 1% if the 10-year's yield climbs to 6% and gains of over 10% if it declines to 4.5%, strategist says.
For Standard Chartered's global chief investment office, bond and money markets are overly hawkish on the Federal Reserve.
The rising yield on the 10-year U.S. Treasury has created a strong opportunity for investors with a six- to 12-month horizon, according to a major British bank.
Since the beginning of September, the U.S. bond market has faced a historic selloff on concerns over high inflation, with the 10-year's yield BX:TMUBMUSD10Y hovering around the 5.269% level early Monday after reaching a high last week not seen since 2002. The yield on the 30-year note BX:TMUBMUSD30Y lingered at the 5.626% mark, also having reached a 24-year high on Thursday.
Rajat Bhattacharya, senior investment strategist at Standard Chartered's global chief investment office, wrote in a recent report that bond arithmetic suggests losses lower than 1% if the 10-year's yield climbs to 6% and gains of over 10% if it declines to 4.5%, he said.
For Bhattacharya, both bond and money markets are overly hawkish on the Federal Reserve. The bank expects disinflation to return as the impacts of oil prices and tariffs begin to ease in the new year.
Given the current economic backdrop, the office recommends quality companies and industries benefitting from the current artificial-intelligence cycle. It said U.S. large-capitalization companies have broadly absorbed the climb in bond yields well and are also supported by forecasts of strong earnings growth driven by investment related to AI.
"Semiconductors and memory remain preferred exposures: structural AI demand should extend the memory upcycle, while long-term supply agreements provide better revenue visibility," Bhattacharya wrote. "The opportunity is also broadening beyond technology and communication services into financials, materials, power and electrification."
Ryan Goh, investment strategist at the bank, added that tighter supply in the memory sector is anticipated through 2028, with long-term deals improving revenue and earnings visibility.
Standard Chartered sees the S&P 500 SPX rising to 8,400 over the next year, but warns that a continuous advance in the 10-year's yield to 5.6% could result in negative returns from the index's level at the time of writing, which was 7,666.
"However, in our base case we expect the 10-year yield is more likely to fall from here," Fook Hien Yap, investment strategist, said.
-Nora Redmond