Who Takes the Lead When the Yield Curve Steepens?

A recent report from Bank of America provides insights into how different sectors and regions may perform as the yield curve steepens, which is crucial for investors navigating the current market landscape.

The bank’s quantitative strategy team noted that over the past two years, the yield curve steepened for 14 months. Among these, 11 months were categorized as “bear steepening,” while three months were identified as “bull steepening.”

Bank of America analysts anticipate further steepening of the yield curve and have examined historical performance data to pinpoint sectors that typically yield positive returns during these phases. They found that during bull steepening periods, sectors like Healthcare, markets in Switzerland, and stocks showing Rising vs. Falling Momentum tend to excel. Conversely, during bear steepening, Basic Resources, Norway, and High vs. Low Risk stocks usually outperform.

The report also highlighted recent market trends, revealing that UK-focused funds experienced their largest outflow in 15 weeks, totaling $1 billion. In contrast, Switzerland saw inflows of $740 million, with Healthcare also attracting $60 million. Financials and Risk stocks experienced notable outflows during the same period.

Analyzing performance across various styles in September, High vs. Low Growth stocks achieved a 6.5% gain, while stocks characterized by Rising vs. Falling Momentum outperformed in 15 of the 20 sectors across eight major European countries.

For investors, sectors such as Healthcare and countries like Switzerland may present potential opportunities as the yield curve continues to steepen. Bank of America emphasizes that the effects of this steepening may vary across sectors, influenced by whether it occurs in a bull or bear market context.