Wall Street bets on pair trade that favours consumer over housing

As investors in US stocks shift their attention from easing trade tensions to the threat of rising bond yields, two big Wall Street trading desks recommend taking advantage of both.

At UBS Group AG and Goldman Sachs Group, the trade is twofold: Buy consumer stocks, which will continue to outperform as the Trump administration ratchets down its tough talk on tariffs and presses retailers not to raise prices. And simultaneously, bet against interest-rate sensitive corners of the market, such as housing, as concerns over debt and the US federal deficit push Treasury yields higher.

Optimism over easing trade tensions reduced uncertainty of a full-scale trade war that risked pushing the economy into a recession and denting US consumers. The S&P 500 Index has erased its losses since early April on the de-escalating trade war. Meanwhile, US bonds are falling, pushing yields higher on mounting concerns about the US fiscal outlook as Congress negotiates a budget deal that includes an extension of Trump’s tax cuts.

Consumer stocks have “a way to go if we get more good news on tariffs and tax reform,” said Aaron Nordvik, head of macro equity strategy at UBS, in a note to clients.

Concern about rising yields was on display Wednesday, when investors dumped US stocks following a disappointing Treasury auction that sent bond yields surging past levels seen during April’s market rout.

A UBS basket of consumer discretionary stocks is outperforming the S&P 500, advancing almost 28% since April 8, compared to the benchmark’s 17% gain. While a Goldman Sachs’ basket of consumer stocks — specifically, those that cater to low-income households — reached a new record on Tuesday.

A ratio of a basket of low-income consumer stocks to housing jumped to the highest level since November 2023, according to Goldman Sachs.

“With average gas prices near three-year lows, driven by lower oil costs, we believe low-income households have more discretionary income to spend,” Goldman trading desk’s Louis Miller and Faris Mourad wrote in a note to clients.

On the other side of the trade “shorting housing makes sense given how rates are behaving,” said Daniel Kirsch, head of options at Piper Sandler “If you’re not getting relief in long-term interest rates, it’s tougher for housing to really work.”

Treasuries extended a selloff Wednesday with 20- and 30-year rates rising above 5%. Two-year yields, most sensitive to the Federal Reserve’s interest-rate policy, edged above 4%.

“Higher long-term rates will simultaneously add challenges to homebuyers, because of higher mortgage rates,” Goldman’s trading desk wrote.

Since mid-May a UBS basket of US housing stocks is down 3.5% on growing fears that yields will stay elevated.

Equity options traders are making similar bets. Cost of protection against a 10% decline in the Consumer Staples Select Sector SPDR Fund ETF (XLP) in the next month versus the cost of options betting on a 10% gain dropped below its main moving averages, indicating that investors aren’t concerned about possible losses in the sector. Meanwhile, a 50-day moving average for a similar ratio for the SPDR S&P Homebuilders ETF (XHB) jumped to the highest level since February 2024.

“Investors are positioning for continued resilience in consumer demand, especially in stocks with upside momentum,” wrote Chris Murphy, co-head off derivatives strategy at Susquehanna International Group.

© 2025 Bloomberg

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