Analyst Says Bond Market Bears Wake Up: Likes Cyclical Stocks, Financials

Bonds have entered a bear market and investors should buy cyclical stocks, as well as banks and companies with unfunded pension deficits, an analyst said Friday. A rally in oil prices since March and the return of at least some level of inflation expectations has helped push bond yields higher and prices lower. Credit Suisse's Andrew Garthwaite believes the bear market for bonds is here, and said that historically, both higher yields and inflation expectations have correlated positively for equities. Cyclical stocks like automakers, airlines and retailers "outperform when bond yields rise," Garthwaite said. Bank and other financial stocks are "the big winners, we think, from a rise in bond yields are financials," the analyst said. Garthwaite in particular highlighted European banks he rates at Outperform: Credit Agricole CRARY, Intesa Sanpaolo OTC: ISNPY) and UBI Banca BPPUY. European life insurance companies should benefit from a rise in yields offered by German bonds, Gartwaite said, whereas life insurers based in the U.K. "look abnormally expensive." The stocks of companies with unfunded pension deficits will benefit from a bear market in bonds and higher yields, according to Garthwaite. United States Steel Corp. X Delta Air Lines Inc.DAL Raytheon Co. RTN and International Paper Co. IP all have unfunded pension deficits equal to 20 percent or more of their market capitalization, and are rated at Outperform by Credit Suisse. Garthwaite said he's cautious on U.K home builders and real estate investment trusts. European regulated utilities "look expensive" while the same sector in the U.S. "seems to have priced in quite a lot of bad news," according to Garthwaite