Worries about inflation are misplaced, according to Pieter Stoltz, head of equity strategy for UBS in Australia, and, combined with the fall for tech stocks, present a chance for investors to buy.
We think the risk of an inflation outbreak is low, Mr Stoltz said, pointing to the winding down of some of the government support measures, such as JobKeeper, which ends this month.
Without continuous fiscal stimulus I dont see how well get rampant inflation, he said.
The yield on the 10-year Australian government bond touched 1.9 per cent last month, after starting the year below 1 per cent, and if it reaches 2 per cent, UBS believes investors will be rewarded if they dive into growth stocks, such as tech companies.
This is an opportunity for a tactical trade to go long duration, long growth and long tech if bond yields overshoot, Mr Stoltz said. It is a big opportunity.
The spike in yields over the past month has been driven by worries among fixed income investors that low interest rates and the trillions of dollars in government stimulus flooding developed economies will lead to a rapid rise in prices for goods and services.
Inflation battles
Inflation is anathema to bond investors, because it erodes the value of money earned in the future as interest on debt. These fears led to the sell-off in bonds that pushed yields higher.
Central banks, including the Reserve Bank of Australia, disagree and have held firm that inflation is still a distant concern.
Reserve Bank of Australia Philip Lowe speaking at The Australian Financial Review Business Summit on Wednesday.  Dominic Lorrimer
Speaking at The Australian Financial Review Business Summit on Wednesday, RBA governor Philip Lowe said that the slack in the labour market meant inflation was unlikely to meet the central banks targeted range of between 2 per cent and 3 per cent.
Australias top central banker added that forecast inflation within this band would not be enough to persuade the RBA to increase interest rates.
This is an evolution from the approach earlier in the inflation-targeting regime, in which forecasts of inflation played a more central role in decision-making about interest rates, Dr Lowe wrote. We want to see actual inflation outcomes consistent with the target before moving the cash rate.
Soaring stocks
An opportunistic investment in tech stocks sits alongside UBS expectation that the winners on the local sharemarket this year will be cyclical stocks, including the banks, that typically prosper in a rebounding economy.
The broker predicts the ASX 200 benchmark will reach 7600 points this year, a 13 per cent rise from its current level. The index is up nearly 2 per cent for the year but has faltered in the past month as bond yields have climbed.
Were quite optimistic about the ASX 200 this year, Mr Stoltz said. If you have low to moderate inflation and low bond yields, thats a sweet spot for equities.