Citigroup Global Equity Strategist - An Old Conundrum

 De-coupling — Global government bond yields have fallen to multi-decade lows but equity markets don’t seem to care. While global stock prices have rallied 8% over the last few weeks, global bond yields have fallen 25 basis points.

 Equities Winning 6-2 — Over the last 11 years, there have been 10 occasions when global bond yields and stock prices have diverged. Equities have been proven ‘right’ six times versus bonds two times. Divergence was unresolved twice.

 Bond Yields Expected to Rise — This time, we expect the conundrum to be resolved through rising bond yields. Citi rate strategists suggest that a sustained global economic recovery and gloomy fiscal outlook should push yields up from their current historically low levels.

 What Should Equity Investors Do? — Falling bond yields didn’t help stock prices rise so rising yields shouldn’t be a major headwind for equity investors. We think those expecting a rise in bond yields should consider buying Japanese equities (local currency) and global cyclicals like Diversified Financials, and consider selling global defensives like Telecoms.