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July 18, 2019, 11:59 a.m. EDT

If a rally in bonds grinds to a halt, Credit Suisse says investors should adopt this strategy

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By Steve Goldstein, MarketWatch


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Power plants are the place not to be if bond yields climb.

The bond rally can’t last forever, can it?

The yield on the benchmark 10-year U.S. Treasury /zigman2/quotes/211347051/realtime BX:TMUBMUSD10Y 0.00% has dropped more than 1 percentage point from its November peak. Strategists at Credit Suisse think the fixed-income rally has an expiration date — they say the growth in M1, a measure of the money supply, is consistent with a steeper yield curve. That could mean the 10-year may reaches a yield at around 2.4% over the coming year, up from its current rate at 2.059%, as of midday Thursday in New York. Bond prices fall as yields rise.

Utilities are the worst performing sector when bond yields climb, the Credit Suisse analysts say.

They also are one of the worst-performing sectors if the new orders component of the Institute for Supply Management’s manufacturing index climbs. Utilities aren’t the worst sector in that environment — pharmaceuticals are — but they’re near the bottom.

Then there are the companies themselves, which are expensive on a variety of metrics, including 12-month forward price-to-earnings.

Plus there are long-term concerns, like the fact electricity consumption has been little changed since 2005, as renewables and battery storage disrupt models and better technology is used to reduce usage.

The investment bank has an underweight rating on Consolidated Edison Inc. /zigman2/quotes/207137172/composite ED +0.91% , DTE Energy Co. /zigman2/quotes/205073403/composite DTE +0.34% , Southern Co. /zigman2/quotes/208000495/composite SO +0.60% , Spire Inc. /zigman2/quotes/207690569/composite SR +0.56% and NorthWestern Corp /zigman2/quotes/208537368/composite NWE 0.00% .

Credit Suisse also is wary on gold , where they see downside potential. The speculative position in gold as a share of open interest has climbed, which usually leads to declines later. Also, while gold typically falls when financial credit default-swap spreads falls, but they haven’t this time around.

One more allocation to avoid is Swiss stocks /zigman2/quotes/210598650/delayed CH:SMI -0.09% , which are typically underperform when German bunds rise, European purchasing managers indexes climb or the dollar /zigman2/quotes/210598269/delayed DXY -0.25% weakens. Valuations are expensive and earnings revisions are seen as negative, Credit Suisse researchers said.

/zigman2/quotes/211347051/realtime
add Add to watchlist BX:TMUBMUSD10Y
BX : Tullett Prebon
1.80
0.00 0.00%
Volume: 0.00
Dec. 12, 2019 6:12a
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/zigman2/quotes/207137172/composite
US : U.S.: NYSE
$ 87.59
+0.79 +0.91%
Volume: 1.82M
Dec. 11, 2019 6:30p
P/E Ratio
20.64
Dividend Yield
3.38%
Market Cap
$29.12 billion
Rev. per Employee
$805,710
loading...
/zigman2/quotes/205073403/composite
US : U.S.: NYSE
$ 125.34
+0.42 +0.34%
Volume: 925,423
Dec. 11, 2019 6:30p
P/E Ratio
21.05
Dividend Yield
3.23%
Market Cap
$24.08 billion
Rev. per Employee
$1.34M
loading...
/zigman2/quotes/208000495/composite
US : U.S.: NYSE
$ 60.69
+0.36 +0.60%
Volume: 5.80M
Dec. 11, 2019 6:30p
P/E Ratio
13.95
Dividend Yield
4.09%
Market Cap
$63.65 billion
Rev. per Employee
$808,954
loading...
/zigman2/quotes/207690569/composite
US : U.S.: NYSE
$ 79.70
+0.44 +0.56%
Volume: 267,146
Dec. 11, 2019 6:30p
P/E Ratio
22.62
Dividend Yield
3.12%
Market Cap
$4.06 billion
Rev. per Employee
$595,722
loading...
/zigman2/quotes/208537368/composite
US : U.S.: NYSE
$ 70.64
0.00 0.00%
Volume: 0.00
Dec. 11, 2019 6:30p
P/E Ratio
17.18
Dividend Yield
3.26%
Market Cap
$3.59 billion
Rev. per Employee
$780,111
loading...
/zigman2/quotes/210598650/delayed
CH : Switzerland: SWX
10,396.01
-9.30 -0.09%
Volume: 0.00
Dec. 12, 2019 11:57a
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/zigman2/quotes/210598269/delayed
US : U.S.: ICE Futures U.S.
97.17
-0.24 -0.25%
Volume: 0.00
Dec. 12, 2019 6:02a
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Steve Goldstein is MarketWatch markets editor for Europe. Follow him on Twitter: @MKTWgoldstein.

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