The outperformance of cheaper stocks over their high-priced peers has closely tracked the rise in 10-year U.S. inflation-protected yields out of deeply negative territory, as investors bet on a strengthening global economy, wrote a team including Robert Buckland on Friday.

A continued move toward zero percent in that real yield benchmark would imply further relative upside for the world’s value shares of 15 to 20 percentage points, they calculated.

The MSCI AC World Value Index already outperformed its growth counterpart by 14 percentage points since the end of October, according to data compiled by Bloomberg. Over the same period, the 10-year real yield has risen to minus 0.65% from minus 0.83%.

Negative real rates had been seen as a cornerstone of the growth share rally of recent years, partly because they enable investors to justify higher valuations for them. While the rise in real yields is a signal the U.S. economy is gaining traction — a positive for investors — this has triggered a rotation into cheaper cyclical shares, which are seen as more closely exposed to the economic recovery.

The global value gauge is dominated by shares from the financials, health care and industrials sectors, according to MSCI.

The value rotation will likely be capped by the 10-year real yield reaching 0%, a level where the Federal Reserve will likely step in to prevent Treasuries from selling off further, according to Citi.

Rotation Reversal

There are two scenarios which could reverse this trend, the first of which is a failure of the global economy to recover, the strategists suggested. The second: further central bank intervention, perhaps to stabilize disorderly bond markets, could also send real yields back down toward the minus 1% level, the strategists said.

“Value investors should enjoy this rotation while it lasts, but central bank obligations to finance extravagant fiscal policy mean that there is a natural cap on real yields,” the team wrote.