UBS strategists Gerry Fowler and Sutanya Chedda warned that European equities face a more difficult path as rising US bond yields increasingly narrow rather than crush the market.
The US 10-year yield climbed from 3.94% at the end of February to 5.00% last week, while real yields rose from 1.68% to 2.67%. The shift has altered how equity markets respond to rate moves. Since March 1, weeks when the 10-year yield rose saw just 42% of the MSCI Europe index gain in weight on average, compared with 64% during falling-yield weeks—a 22-percentage-point gap UBS called the widest in its sample.
"The market is not falling on higher yields so much as narrowing under them," the strategists wrote, describing the dynamic as "a regime change we have not had to price in thirty years."
The sensitivity varies sharply across yield levels. When the 10-year traded below 3%, rising yields were still broadly interpreted as a sign of economic growth and most of the index advanced. In the 4% to 4.5% range, market breadth dropped to 30% on weeks where yields jumped more than 20 basis points, down from 61% on down-yield weeks. Above 4.5%, UBS noted it is the sharp weekly increase that does the damage.
Over the past three months, that dynamic has produced a narrow rally. Energy, banks, chemicals and basic resources are the primary gainers, while construction, consumer products, telecoms, utilities and food and beverage stocks have lagged.
