Large cap stocks, quality names will perform better as interest rates rise.

Morgan Stanley believes that large-cap and blue-chip stocks will perform relatively better when interest rates rise.

The investment bank explained in a note this week that the 10-year U.S. Treasury yield of about 4.35% would be an important technical level to watch for signs that interest rate sensitivity for stocks may be increasing.

Last Tuesday, 10-year yields topped that level for the first time this year, and as stocks sold off, the rolling correlation between bond yields and stocks fell further into negative territory.

“Small-cap and lower-quality stocks underperformed on a daily and weekly basis, supporting our view that these areas of the market continue to exhibit greater interest rate sensitivity than large caps, particularly to upward movements in yields,” the bank said.

“In our view, interest rate sensitivity is likely to increase more broadly if we see a sustainable move above 4.35-4.40 over a 10-year period, but we would still expect large-cap blue chip stocks to perform relatively better. .”