LONDON (ShareCast) - (ShareCast News) - Sovereign bond yields were headed higher, analysts at Credit Suisse warned - and possibly by even more than they themselves were already expecting - even as they recommended clients add to their holdings of the so-called dividend aristocrats and certain cyclicals.
Stateside, strategist Andrew Garthwaite and his team forecast the yield on the 10-year US Treasury note would reach 2.15% by year-end 2017, with a move as high as 2.25% possible.

In parallel, the yield on similarly-dated German Bunds was seen advancing to between 50 and 75 basis points in mid-2017, they said.

Among the drivers of those moves cited by Garthwaite were: 1) a general move on the part of global policy-makers towards fiscal easing; 2) proxies of growth such as industrial production and commodity prices implied yields should continue gaining; 3) China was no longer exporting deflation; 4) US wage growth was on a "modest" uptrend; 5) implied volatility was low; 6) populism tended to be bad for bonds; 7) logistical and political challenges for QE in both Japan and the euro area were likely to araise; 7) and outside of Japan G4 debt to GDP ratios would stabilise on higher real yields.

Nonetheless, shares could "accomodate" an increase in the 10-year US Treasury note yield to as high as 2.5% and in the Bund to 1.0%, before the relative valuation case eroded.

In terms of specific stocks, the Swiss broker recommended clients top-up on their holdings of consistent dividend growers such as Sanofi, Roche and Weir.

Growth stocks on the other hand were now cheap, but caution should be exercised for the most expensive of those, including Danone, Henkel, Inditex and Novozymes.

US cyclicals were also an area best avoided given that they already seemed to be discounting a 10-year yield of 2.4%. Hence, the best way to "play rising yields" Garthwaite said, was via financial, especially retail banks and UK life insurers.

Credit Suisse also retained an 'overweight' on infrastructure but 'underweight' on consuer staples (excluding tobacco).

The latter was most exposed to rising inflation and yields, Garthwaite said.

The same strategy team also stayed at 'underweight' on US and European regulated utilities.

"To us, this sector is a disrupted bond proxy facing greater-than-realised regulatory risk."

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