Carmakers, retailers, companies in the financial sector and small caps are most vulnerable to further potential rises in US government bond markets, according to UBS strategists.
This is one of a number of scenarios that may ensue from here, with a fall in bond yields expected by the end of the first quarter.
Inflation is the key, especially a firmer idea of the impact of President-elect Donald Trump’s fiscal and tariff plans.
While the US "drives global rates", the strategists noted that inflation is "very different across regions".
US inflation showed improvement in the December consumer price index yesterday, but the strategists said they "do expect a few months of high US inflation yet".
A long-end US Treasury rally – that is, yields falling for longer-dated bonds, ie 10-years and 30-years – “may have to wait for US inflation and the economy to turn, and for the Fed to not ‘appear’ behind the curve.
"We expect this trigger by late Q1 though peak fear should have passed with the next (Jan) inflation print."
They noted that while inflation is proving persistent in the US, it is "coming off hard" in the rest of the world, "not least because of China".
As China gains share amidst stalled global exports, this "puts strain" on exports of other emerging-market and developed market economies, "pushing both their currencies and rates lower".
The recent rally in bond yields, which began after Christmas has seen “fiscal fears hurt the long end, and despite growth still having been strong in the US, equities retraced”.
Despite a hawkish Fed in December the yield curve has ‘bear steepened’, as long-term rates increase at a faster rate than short-term rates.
“If supply concerns persist after we hear more about Trump’s fiscal and tariff plans, the impact of rates on other asset classes may deepen.
The UBS team said that a further 50 basis-points rise in 10-year in rates along with a small 50bps widening of spreads and a 2 point decline in US PMI, which is commensurate with a 50bps widening, "could hurt US small cap stocks by just over 7%.”
Under simulations run by the UBS strategists for this scenario, autos, real estate, consumer durables, retail, and financials would be the most vulnerable industries.