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Treasuries at 3% Is the Time for Value Investors to Go All In

(Bloomberg) — Investors should hold off from ditching all their high-priced growth stocks for cheaper value shares as bond yields rise, at least until benchmark Treasuries yield 3%.

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That’s the view of The Leuthold Group’s Jim Paulsen, who calculated the risk-return profiles of U.S. growth and value shares at different Treasury yield ranges, going back to 1950. The firm’s chief investment strategist said returns depend more on the level of bond yields than the direction they are traveling in, according to a note Thursday.

“Throughout the post-war era, when bond yields were below 3%, growth stocks provided investors with consistently higher returns and much lower volatility than value stocks,” Paulsen wrote. “Even though bond yields appear poised to rise in the coming years, the 10-year yield would need to double before the sweet spot for growth stocks is lost and growth finally loses its mojo.”

Growth shares led U.S. stocks lower Thursday, as investors weighed the Federal Reserve’s plans to raise interest rates next year. Cheaper shares outperformed, with the S&P 500 Value Index rising 0.7%. While the 10-year Treasury yield fell to 1.41%, it is expected to climb to just under 2% by the end of 2022, according to a Bloomberg survey.

Value investing — buying cheaper, economically-sensitive shares — has been an underperforming strategy for well over a decade with the U.S. gauge in a downtrend against its growth peer since 2007. It hit an all-time relative low last month. A brief revival late last year as Treasury yields climbed on reflation hopes peaked in March, when growth shares resumed their outperformance.

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Still, Paulsen cautioned that growth shares have their own issues, not least excessively high valuations.

“Investors should not be ‘all in’ with growth stocks, nor even necessarily overweighted,” he said. “But until the 10-year yield breaches 3%, history strongly advises against moving too aggressively away from growth to embrace the value story fully.”

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