How the Market May Be Pricing in Higher Rates

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Suddenly the market seems to be taking higher interest rates seriously.

Banks and financials, which stand to benefit from increased yields, are among the best major sector this week. Utilities, which trade just the opposite, are getting clobbered.

Commentary from prominent figures may be helping the move. Thomas Barkin, a new policymaker at the Federal Reserve, said this morning that rates are still too low given the “remarkably strong” economy. Jamie Dimon, himself a former Fed official, says increased demand for capital could push the yield on 10-year Treasury notes to 4 percent — a level it last saw in April 2010.

“More people are going back to work, household formation is going up, housing’s in short supply, which is a plus for the economy,” Dimon, who now runs JPMorgan Chase (JPM), told Bloomberg television in China. “America looks pretty good.”

Financials vs Utilities, this week, 5-minute percentage chart.

Several other things have the potential to impact interest rates in the near term. Two key inflation reports are due this week: Producer prices at 8:30 a.m. ET tomorrow and consumer prices at the same time on Wednesday. The Treasury Department also auctions 10-year notes at 1 p.m. tomorrow and 30-year bonds on Thursday. Weak demand for those safe-haven securities could lift borrowing costs.

This isn’t a trade recommendation and everyone needs to do their own homework, but customers looking to follow the trend may want to know the following symbols:

  • USM18: 30-year U.S. Treasury bond futures (June contracts). These would tend to fall in price if interest rates rise.
  • TYM18: 10-yr U.S. Treasury note futures (June contracts). These would tend to fall in price if interest rates rise.
  • SPDR S&P Financial ETF (XLF). This holds big financials like JPM and Goldman Sachs (XLF). Investors generally look for it to rise along with interest rates. It also has deep options liquidity.

Disclosure: Trading futures entails potentially significant risk, including losses greater than your initial investment. It may not be suitable for all customers. Options trading may not be suitable for all investors.

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David Russell is VP of Content Strategy at TradeStation. Drawing on nearly two decades of experience as a financial journalist and analyst, his background includes equities, emerging markets, fixed-income and derivatives. He previously worked at Bloomberg News, CNBC and E*TRADE Financial. Russell systematically reviews countless global financial headlines and indicators in search of broad tradable trends that present opportunities repeatedly over time. Customers can expect him to keep them appraised of sector leadership, relative strength and the big stories – especially those overlooked by other commentators. He’s also a big fan of generating leverage with options to limit capital at risk.