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Rising treasury yields flash a warning for broader markets: strategist

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Treasury yields rise after on stimulus optimist. Victoria Fernandez, Crossmark Global Investments Chief Market Strategist joins Yahoo Finance Live to discuss how stocks are faring and outlook for the credit market amid the pandemic.

Video Transcript

ZACK GUZMAN: I want to turn our attention back to the markets today as we continue to see that tech sell off hit the weakest performing sector today by far off by close to 1%. And when we look at the yield on the 10 year, once again rising in today's session back up to 1.6%. So let's turn back to the markets with our first market guest here in the back half of today's show.

Victoria Fernandez is Crossmark Global Investments Chief Market Strategist. She joins us now. And Victoria, when we look at it, a lot of attention has been placed on the yield here on the 10 year. We watched that play out last week. Today though, Janet Yellen, Treasury Secretary, was kind of talking about those inflation risks, reaffirming to the market that the Fed will have tools to kind of combat any inflation that does come here in the short term. So what's your take on maybe how the markets digesting these moves right now?

VICTORIA FERNANDEZ: Yeah, you know, it's interesting, Zack, I think the narrative has really kind of shifted. Over the last week or so, you had people wanting the Fed to really come in and not really do anything, be accommodative and maintain that stance. And then as we start to see rates move higher, then they want the Fed to actually come out and at least do a verbal intervention if nothing else. But they're watching these rates move higher and they're concerned about this. Then we have a strong jobs report on Friday. We start to see some numbers come back in the service industry. And so then maybe the narrative is, well, maybe yields should be higher, because it's being pushed by growth, by better growth.

And so you have to look at this number and say at a 1.6, we're not even back to where we were pre-COVID, right, back in January or February of last year. So I'm not concerned with the level of rates right now. Yes, it is affecting the tech sector, just because those are considered kind of longer duration assets, so there's a little bit of consolidation going on there, but I don't think that's necessarily a bad thing, and you're not seeing nervousness from that in the sense of no flight to quality going into the Treasury market right now. You're not seeing credit spreads widen out, so I actually think this consolidation is OK right now. And as long as we don't have another quick move like we had previously and rates moving higher, we should be able to digest it with better fundamentals.

AKIKO FUJITA: Yeah, I was going to point out that the concern doesn't seem to be about the level of the rates right now, but just how quickly it accelerated over the last several weeks or so. You say you're not so concerned right now, what are the warning signs you're going to be looking for in the weeks ahead in terms of what those yields on the 10 year Treasury specifically are likely to signal for the broader market?

VICTORIA FERNANDEZ: Right, I think the nervousness is going to be, again, the pace if we see it continue to be really quick, or if it tends to be that the inflation that a lot of people are concerned about, that's, you know, making the longer end of the curve move higher. If that becomes more sustainable. Right now, they're saying inflation, if you listen to the Fed, they're saying it's more transitory, right? That it's due to base effects, it's due to supply chain issues that are out there right now in regards to COVID.

But as manufacturing comes back more and more, as those elements tend to diminish, then we're going to see inflation come back down, and perhaps not as much pressure on yields on the longer end. Where yields move higher is going to determine how the Fed responds going forward. So at this point, if it's transitory inflation that's driving it, if it's positive growth that's driving it, then I'm not too concerned. If I see the credit markets really start to react, that's kind of the canary in the coal mine for a lot of people. We're seeing a little bit in high yield, but it surely hasn't bled through to investment grade. That's where we would be watching for signs of trouble.

ZACK GUZMAN: So how should investors be playing it then, because you could look at it one way of saying, all right, tech may be, the move was exaggerated in the sell off we saw there, so maybe there are some buying opportunities, or would you say that that trend is expected to continue? If rates are expected to rise, I mean, what would be your advice to clients out there trying to reallocate for the rest of 2021?

VICTORIA FERNANDEZ: Sure, so we actually, you know, take a longer term perspective with our clients, right? And for us, that means, what are the trends over the next 12, 18, 24 months? And we still think it's going to be in that growthier side of the market. So we like the businesses that are involved with 5G, with the data infrastructure, with cloud. We still like those semi names.

We actually use the pullbacks as an opportunity to upgrade our portfolio by buying Nvidia. We like that name in the semi space. So we think you can use it opportunistically to put names in your portfolio that perhaps the valuations were just too high previously. This consolidation phase allows you to build some of those names, and we think it's where the trends will continue. That doesn't mean you don't have any value or cyclical names in your portfolio at all, you have to have that barbell approach, that balanced approach.

But we like a little bit of weighting towards the growth, because we see continued trends, especially as everyone changes the way they do their daily lives and their work, jobs that they have working from home or working remotely. I mean, we're doing this remotely that we normally wouldn't be doing. So I think you continue with some of those growth trends but have some value in cyclical in your portfolio as well.

AKIKO FUJITA: Victoria, I'm curious how you look at just the acceleration and some of these ESG plays that we've seen in the market, particularly looking at electric vehicles, for example. This is a space that has just run so hot, and we're not just talking about a name like Tesla. Would you get in on the space overall, or does this fit into that category where valuation is still way too high?

VICTORIA FERNANDEZ: You know, currently, Akiko, we are not in the EV space, per se, and we're not actually owners of car manufacturers at all. But we think if you're going to be looking in this space, because valuations have been high, perhaps you look at different areas that support the electric vehicle market, right? So you look at maybe battery makers, you look at those companies that build the charging stations, kind of the support network that electric vehicles are going to need going forward to make consumers feel a little more comfortable buying an electric vehicle.

And when you look at ESG as a whole, I think you have some opportunities right now. You know, you look at NextEra Energy, that's a name we really like, because they have wind and solar that they do power generation from, and that's going to be a lot of what you see going forward because of the pressures of ESG, especially on like the energy sector and the utility sector. So there are opportunities there, but I think you need to be specific. When you're looking at these companies, do your research, because valuations can be tricky.