Back Quantitative

Quant Market in Numbers: Yield Trends Suggest a Value and Risk-on Catchup Trade

Published on March 6, 2024

∙ Download the PDF Report

By

Dennis DeBusschere

Brian Herlihy

Sophia Wang

Kevin Brocks

A big disconnect has opened up between yields/yield curves (moving higher) and factors returns. Historically, rising Value and Risk-on factors have the highest betas to changes in yields. Risk-off tends to lag as yields backup.

Yields continue to be an unusually strong contributor to market and factor vol. While the outlook for near-term policy rates remains a hot topic, the influence of yield fluctuations will remain high (HERE). Changes in yields can alter the macro regime, but with economic growth strong, 10yr yield and the inverted yield curve are biased higher.

Momentum betas to yields have been trending higher, helping explain the factor’s surge this year. Value factors on the other hand have 1) strong betas to 10yr yields, 2) significant Value underperformance relative to macro fundamentals, and 3) has been among the worst performer YTD. Strong growth readings and a curve that is biased higher (some rate cuts + stable to higher 10yr yields) make positioning for a Value rebound increasingly interesting.

Sectors that most benefit from rising yields and the yield curve are Financials and Energy while REITs and Utilities have the most negative yield betas. We discussed in Strategy report (HERE) about potential Energy catchup on oil prices improvement. As a sector with higher beta to yield changes, expected rising yield and yield curve re-steepening should also bring some tailwind to the sector.

At the end of this report we list a sector neutral group of stocks with the highest betas to yields and the yield curve.

Yield Trends Suggest a Value and Risk-on Catchup Trade: Yields continue to be an unusually strong contributor to market and factor vol. While the outlook for near-term policy rates remains a hot topic, the influence of yield fluctuations will remain high (HERE). Changes in yields can alter the macro regime, but with economic growth strong, 10yr yield and the inverted yield curve are biased higher.

A graph of growth and progress

Description automatically generated with medium confidence

Historical factor betas to changes in the 10yr, 3mo and yield curve tend to be directionally similar, but longer-dated yields and the curve have a greater influence. Value and risk-on factors, including Liquidity and Earnings Turbulence are most positively sensitive to yields. In other words, they tend to benefit in a rising yield backdrop, which more than half of investors surveyed are expecting near term (HERE). Low Volatility tends to face the greatest headwind from rising yields.

A table with numbers and text

Description automatically generated with medium confidence

Shorter-term (past 4 years), Value remains to be the most yield sensitive factor across all yields, and Size and Momentum betas have increased. That is aligned with the outperformance of mega 7 Tech names which are highly exposed to Size and Momentum. Momentum of Price has been the best performing factor this year, far exceeding all other factors, and the improved sensitivity with yield also supported to some extent. The biggest laggards relative to the backup in yields and steepening of the curve have been 1) Value and 2) Risk-On factors.

The return divergence between Value and yield this year continues to widen out. And Value has lagged the improvement in macro forces in general (PMI for instance, HERE). Economic growth trends remain strong, much stronger than investors expected, and that should be a tailwind for Value factors especially after they have lagged the macros so far this year.

A graph of a graph of value

Description automatically generated with medium confidence

Sector Focus: Sectors that benefit most from rising yield and yield curve are Financials and Energy while REITs and Utilities have seen the most negative beta with yields considering their median beta post-GFC. That is consistent with factors as Financials and Energy are usually more Value exposed.

A chart with numbers and lines

Description automatically generated with medium confidence

Yield sensitivity today at sector level is roughly aligned with historical pattern with the exception from Staples and Discretionary. Staples is having slightly positive beta to yields while Discretionary beta is unusually negative today. As we discussed in Strategy report (HERE), Deep Cyclicals, especially Energy and Materials are having relative weak fundamentals but the oil rebound and lagging returns of Energy leaves room a catchup trade. The yield beta to the sector and expected move also help that catchup.

A graph of a graph showing the value of a company

Description automatically generated with medium confidence

Stock List: Below we list the stocks with the greatest sensitivity to 10yr yields and the yield curve. This is a group of names that should track changes in yields over the course of the year.

A screen shot of a table

Description automatically generated

DISCLOSURES AND DISCLAIMERS

Analyst Certification

The analyst, 22V Research Group, primarily responsible for the preparation of this research report attests to the following: (1) that the views and opinions rendered in this research report reflect his or her personal views about the subject companies or issuers; and (2) that no part of the research analyst’s compensation was, is, or will be directly related to the specific recommendations or views in this research report.

Analyst Certifications and Independence of Research.

Each of the 22V Research analysts whose names appear on the front page of this report hereby certify that all the views expressed in this Report accurately reflect our personal views about any and all of the subject securities or issuers and that no part of our compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views of in this Report.

22V Research (the “Company”) is an independent research provider. The Company is not a member of the FINRA or the SIPC and is not a registered broker dealer or investment adviser. 22V Research has no other regulated or unregulated business activities which conflict with its provision of independent research.

22V Research, LLC is a professional services and independent publication organization. 22V Research, LLC is not a securities broker-dealer, not a member of the Financial Industry Regulatory Authority (FINRA), not a registered investment advisor (RIA) and not a member of SIPC.

Securities transactions, when offered, are offered by 22V Securities, LLC through LPS Capital, LLC. Certain employees of 22V Securities, LLC are dually registered as securities representatives of LPS Capital, LLC or Analyst Hub Securities, LLC. 22V Securities, LPS Capital and Analyst Hub Securities are members FINRA, SIPC.

https://brokercheck.finra.org/

Current Ratings Definition.

SECTOR OUTPERFORM: An “outperform” rating anticipates the company will outperform the S&P Regional Banking Index (peer group).

SECTOR PERFORM: A “market perform” rating anticipates the company will perform in line with the S&P Regional Banking Index (peer group).

SECTOR UNDERPERFORM: An “underperform” rating anticipates the company will underperform the S&P Regional Banking Index (peer group).

Limitation Of Research And Information.

This Report has been prepared for distribution to only qualified institutional or professional clients of 22V Research Group. The contents of this Report represent the views, opinions, and analyses of its authors. The information contained herein does not constitute financial, legal, tax or any other advice. All third-party data presented herein were obtained from publicly available sources which are believed to be reliable; however, the Company makes no warranty, express or implied, concerning the accuracy or completeness of such information. In no event shall the Company be responsible or liable for the correctness of, or update to, any such material or for any damage or lost opportunities resulting from use of this data. Nothing contained in this Report or any distribution by the Company should be construed as any offer to sell, or any solicitation of an offer to buy, any security or investment. Any research or other material received should not be construed as individualized investment advice. Investment decisions should be made as part of an overall portfolio strategy and you should consult with a professional financial advisor, legal and tax advisor prior to making any investment decision. 22V Research Group shall not be liable for any direct or indirect, incidental or consequential loss or damage (including loss of profits, revenue or goodwill) arising from any investment decisions based on information or research obtained from 22V Research Group.

Reproduction And Distribution Strictly Prohibited.

No user of this Report may reproduce, modify, copy, distribute, sell, resell, transmit, transfer, license, assign or publish the Report itself or any information contained therein. Notwithstanding the foregoing, clients with access to working models are permitted to alter or modify the information contained therein, provided that it is solely for such client’s own use. This Report is not intended to be available or distributed for any purpose that would be deemed unlawful or otherwise prohibited by any local, state, national or international laws or regulations or would otherwise subject the Company to registration or regulation of any kind within such jurisdiction.

Copyrights, Trademarks, Intellectual Property.

22V Research Group, and any logos or marks included in this Report are proprietary materials. The use of such terms and logos and marks without the express written consent of 22V Research Group is strictly prohibited. The copyright in the pages or in the screens of the Report, and in the information and material therein, is proprietary material owned by 22V Research Group unless otherwise indicated. The unauthorized use of any material on this Report may violate numerous statutes, regulations and laws, including, but not limited to, copyright, trademark, trade secret or patent laws.