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Stocks if 10 Year Hit 2% This Year?


wescobrk
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That is a good question, one I’ve been asking myself.

 

My understanding of the consensus is:

 

1. if the 10year moves up *gradually and stays under 3% - that is likely good for stocks, especially with selling the long and buying the short which steepens the curve.

2. But it it moves fast or too high - above 3%, that will have a negative effect. The fed will have lost (indirect) control over it.

 

So I guess, buy banks? They’re most correlated with rising 10-yr.

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In bond yields go to 2% it will be because the virus is being defeated and the economy is on fire (annual GDP growth of +8% for US).

 

Stocks to own? Cyclicals; commodities; service sector. I agree this would be good for BRK.

 

What are people thinking about US$ in this scenario?

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I expect low debt asset light growth stocks to continue to do well if rates go up. The reason is simple. When inflations kick in, if a company wants to maintain a given ROE, for an asset heavy company, they have to put in a ton of assets to maintain the ROE, but for asset light growth stocks, they don't have to put in much additional capital.

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So tech or other companies with competitive advantage which allows them to raise prices, a lot of cash and no debt so no debt servicing. On the negative would be tech companies with revenues expected far in the future or companies that need a lot of debt to stay afloat or companies with large capital expenses.

 

1.5 yield is still pretty low. Even if 10 year yields reach 2% this year, real yields would still be zero. If they get out of control, instead of raising short term rates, the fed could just buy the long end. Unemployment is still almost 10%, I think the Fed will do whatever it takes to avoid an uncontrolled rate rise from impacting the economy.

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