INVESTING: Rising rates could create opportunities for profit

  • Comments
  • Print

Interest rates are interesting, right? Well, to a market geek like me, maybe.

I know the rest of you take a glancing look at borrowing costs maybe once a month, and you might have even stopped doing that, given that rates have been pretty much unchanged over the past year and a half.

A quick bond primer: When you watch CNBC and someone says bonds are falling, that means interest rates are rising, which causes bond prices to fall. When interest rates fall, bond prices rise. Generally speaking, when inflation is high, bond prices go down, because interest rates are going up to keep up with inflation.

The Federal Reserve has been pushing interest rates higher, but that’s had absolutely zero effect on the bond markets. In January, Alan Greenspan called the 10-year note’s stubborn response to his campaign a conundrum.

Perhaps it’s time, finally, for the public markets to follow the Fed.

For the past 18 months, readers of this column have been able to show off in front of their friends with accurate interest-rate predictions. We have flown in the face of conventional wisdom and stated rates weren’t moving higher.

But I now see cracks in the interest-rate bull market that has lasted more than five years. There are a series of negative divergences on both short- and intermediateterm indicators, as bonds have rallied over the past month.

These divergences are confirmed by negative divergences in the utility sector. Utility stocks have been on fire, and I expect that rally will end if rates go up.

I am not saying credit markets are about to go into bear mode. I am still waiting for a few longer-term signals to confirm what I’m seeing in terms of short-term signals.

If these signals are triggered, though, rates could move higher quickly, and I have a list of ways to play the move to maximize the profit potential.

Most of these involve short-selling exchange-traded funds, known as ETFs. There are three ETFs that correlate to longer-term bond markets, such as the 10-year and corporate bonds.

The three-their ticker symbols are TLT, LQD and IEF-all move higher in price if yields fall. These stocks fall if yields go up. So, shorting them is one way to capitalize on a rising rate environment.

In addition, there are two ETFs for utility stocks-UTH and XLU. Both of these should fall if rates rise.

The mutual fund company Rydex has a mutual fund that profits if yields on the 30-year increase. It is called the Juno fund, and the ticker is RYJUX. It is the only mutual fund I know of that profits if rates increase.

I don’t have any long-term fears that inflation is about to go wild. As I have mentioned before, the economic laws of the technology industry (consistently falling prices because of consistently improving productivity) are spreading to more and more parts of the general economy. That will keep a lid on anything crazy. But there is potential for the 10-year to move to 5.5 percent, and keeping a list of ways to profit from that may come in handy.



Hauke is a local money manager. His column appears weekly. Views expressed here are the writer’s. Hauke can be reached at 566-2162 or at keenan@samexcapital.com.

Please enable JavaScript to view this content.

Story Continues Below

Editor's note: You can comment on IBJ stories by signing in to your IBJ account. If you have not registered, please sign up for a free account now. Please note our updated comment policy that will govern how comments are moderated.