Winners and Losers as Rates Shoot Higher

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First the five-year, then the 10-year. Now the yield on the 30-year bond is also hitting new highs.

$TYX.X is the chart to watch on TradeStation. Yesterday it closed at 32.4, which was last seen in June 2015. (Just shift that decimal one spot to the left and you have the official yield of 3.24 percent.)

Three major forces are driving the move: A stronger economy, removal of easy money by the Federal Reserve and big borrowing plans by the U.S. government. And just like most other moves in the market, this one has winners and losers.

Winners

  • Banks and financials are most commonly cited as winners of higher rates because they stand to make more money on lending.
  • Small-cap stocks, usually tracked by the iShares Russell 2000 ETF (IWM), have rallied along with the U.S. dollar. Simply put, higher rates makes the greenback more attractive and foreign currencies less attractive. That, in turn, makes domestically focused small-caps look better than global conglomerates that do more business overseas.
  • Transportation stocks are another classic “strong economy” play. Click here for our special report on railroads.

Losers

  • Safety-play and income stocks are the big losers: Utilities, REITs and Consumer Staples. Not only do they have a lot of debt, but companies in these sectors tend to be valued on their dividends. So when overall yields in the market rise, prices for these companies generally go down. Consumer staples have other problems as well, outlined in this post.
  • Technology and the Nasdaq-100 are also starting to lag. In the last five sessions, for example, the SPDR Technology Fund (XLK) dropped 1 percent as the IWM rose more than 1 percent. These Big Techs have a lot of international exposure and are usually viewed as having high multiples — not ideal when the U.S. dollar and interest rates are rising. There may also be rotation away from the sector as investors sell long-term winners and redeploy capital into newer areas like energy and financials.
  • Global stocks, especially the iShares MSCI Emerging Market ETF (EEM), have been under pressure as the U.S. dollar and domestic growth strengthen.

In conclusion, none of this post should be viewed as a recommendation. And, everyone needs to do their own homework. But it’s always useful to know about these bigger trends when you’re looking at the market.

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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.