Waiting for interest rates to rise has been like waiting for Godot. But now they’re on the move — and fast!
The 2-year Treasury Note yield has climbed to around 0.6 percent from 0.41 percent just since January …
The 10-year yield just surged to 2.3 percent from 1.65 percent …
And the 30-year yield has climbed to around 3.1 percent from 2.23 percent. That’s the highest in six months.
As for bond prices, which move in the opposite direction, they’ve gotten hammered. European bonds are getting whacked particularly hard because they got the most ridiculously overvalued thanks to Euro-QE. But even here in the U.S., an ETF like the PIMCO 25+ Year Zero Coupon U.S. Treasury Index ETF (ZROZ) has plunged more than 22 percent in value from its late-January high.
These are precisely the kind of “Bloody Wednesday” events I’ve been anticipating and warning about. But as I have also explained multiple times, the impact will be felt in different markets at different times and with differing degrees of intensity. Some stocks will even benefit, at least for a while. Knowing who “wins” and who “loses” is crucial if you want to be a successful investor.
Let’s start with some of the obvious losers: Long-term government bonds, REITs, utilities and other bond-like investments. I’ve been dramatically underweighting or avoiding these investments entirely, and I hope you have been too!
Even at 2.25 percent or so, the 10-year Treasury still doesn’t look attractive to me … and neither do many of those other sectors. Home-building stocks may also suffer, as will pure-play companies focused on things like mortgage originations. That’s because higher long-term rates will drive mortgage rates up, crimping refinancing and home buying activity.
But here’s the thing: Rates are rising faster, and by a greater margin, on longer-term Treasuries. In other words, 10-year and 30-year rates are rising more than 1-year, 2-year or 5-year rates.
|Who benefits from faster rising rates and a steepening yield curve?|
That means the yield curve is steepening. The 2-10 spread, which measures the difference in yield between 2-year and 10-year yields, has widened out to 166 basis points (1.66 percentage points). That compares with a low of around 119 points back in January.
Who benefits from that? Core, highly rated banks, that’s who. The steeper the yield curve, the more profit margin they make from deposit-taking and lending. Just punch up a chart of the SPDR S&P Bank ETF (KBE), which is dominated by regional banks and thrifts. You’ll see it broke out to a fresh almost-seven-year high this week.
Then there are stocks tethered to global economic growth, as well as sectors like energy. Greater optimism about future growth in foreign economies is helping drive the move to higher rates. The dollar’s epic advance has also stalled out, boosting the long-term inflation outlook (as currently priced into the global bond market).
Stocks in sectors like materials, industrials, and aerospace could benefit from that improved growth optimism, even as more directly rate-sensitive stocks get whacked. And when it comes to energy, those stocks were already smacked in 2014. They’re already trading for some of the cheapest valuations in three decades. And the “big, smart money” is already starting to buy into them, anticipating better times ahead.
That’s where I’d focus my attention if I were you.
Bottom line: It’s been a long time since we’ve seen interest rates march higher as fast as they are today — almost two years to be precise. That means you may want to dust off your rising rates playbook, and adjust your game plan as I just laid out. You’ll be glad you did if rates keep climbing!
Until next time,