Last week’s surprise bond yield reversal was welcomed with open arms by technology and homebuilder stocks, as investors were quick to follow the smart money based on a more promising economic outlook. Yields on 10-year U.S. Treasury notes jumped to 1.75% as the Federal Reserve’s recent more dovish stance stoked expectations of a stronger economic recovery, which sparked enthusiasm among investors.
Technology stocks were among the best performers, as exemplified by the benchmark tech index Nasdaq 100 soaring more than 4%. Homebuilder stocks, which are seen as a proxy for the overall economy given the need for housing during a period of strong economic expansion, soared even higher as the iShares US Home Construction ETF jumped by more than 6%.
The successful performance of technology and homebuilder stocks was mainly due to their relative safety in comparison to riskier equity markets. While bond yields changed, tech stocks and homebuilders were relatively safe investments that could still benefit from a strong economic recovery.
Investors are expected to continue following the smart money over the coming weeks, with technology and homebuilder stocks providing an attractive blend of high-growth potential and relative safety. Solid corporate earnings could further boost stocks in these sectors, while falling yields could again drive borrowing costs down, making homebuilding an increasingly attractive proposition.
Overall, technology and homebuilder stocks were among the main beneficiaries of last week’s positive bond yield reversal, as investors displayed their confidence in the Fed-driven recovery by quickly following the smart money. With solid earnings in the pipeline and the potential for further yield declines, these sectors are well-poised to benefit from the economic recovery for the foreseeable future.