The S&P 500 is up 11% year-to-date. But there is another
rally that is getting less attention: U.S. Treasury yields have
been on the rise.
Short-term Treasury yields have inched up throughout 2012, while
have bumped up only in recent weeks.
Of course, interest rates are still well below where they were
before the financial crisis. At the start of 2008, the 10-year
was 3.9%, compared with 2.25% today.
Interest rates have been on a downward slide for nearly five years.
The most significant descent started in 2008 when the Federal
Reserve cut the
federal funds rate
to effectively zero. In fact, rates have been low for such a long
time, borrowers have gotten a bit complacent.
There has been little urgency to borrow at low rates because, up
until now, there has been no penalty for waiting. To some extent, a
little bump in rates might do more good than harm to the
. For example, the threat of even slightly higher
rates might do a lot to get potential home buyers off the
sidelines. Likewise, corporations might decide to borrow more now,
locking in low rates before they rise.
Of course, the rise in rates may be a short-term phenomenon.
Hedge-fund managers, however, are betting that it is the start of a
bona fide trend. Believing yields might go even higher, hedge funds
and other large investors sold 78% of their holdings of two-year
the week ended March 13, according to a Bank of America/Merrill
Lynch report. The same report noted that big money managers tripled
their short positions against 10-year Treasuries.
I'll be keeping a close eye on this potential trend. But if rates
continue to trend higher as they have in the past few weeks, a few
companies will be winners...
Banks: Banks will still be able to borrow money at rock-bottom
rates, but may be able to issue new home, consumer, and corporate
loans at higher rates. In my February issue of
The Daily Paycheck
, I profiled
First Financial Bancorp (Nasdaq:
, a regional bank that may be a beneficiary.
Floating rate securities: The interest rate for floating rate -- or
adjustable rate -- debt is determined by short-term lending rates.
A rise in short-term rates generates more income for floating rate
Floating rate funds like
BlackRock Floating Rate Income (NYSE:
should benefit if short-term interest rates continue to creep up.
Since the bottom of the sell-off in October of last year, this
fund's price is up 18% -- a strong move for a steady
yielding almost 7%.
Savings accounts and employment services companies: If you have
money in a
, then you've probably noticed that it is yielding just a little
bit more than if you had stuck it under your mattress. If this
interest rate trend takes hold, then you might see a tiny bit more
yield from your savings account. But for employment companies such
, a little incremental yield goes a long way.
Paychex makes interest income on the money it holds for its clients
until the money is used to pay employees, fund retirement accounts
and so forth. If the employment situation continues to improve and
interest rates rise, then that's a double bonus for employment
Risks to Consider:
On the flipside, there are a couple of areas I'd avoid if rates
are being called frequently as companies redeem the bonds to issue
cheaper debt before rates rise. And mortgage
investment trusts (REITs) like
are facing headwinds too. In the short term, higher mortgage rates
will likely trigger a new wave of mortgage
(to take advantage before rates rise too far), which will be a drag
on their business.
Action to Take -->
It is still too early to say whether this recent lift in interest
rates is a trend or a flash in the pan. Surprisingly bad economic
news out of China or another debt emergency in Europe could cause
investors to find their way back to the relative safety of
Treasuries -- driving the yields back down. But I always want you
to be prepared for any change in the
. And this is something I'm going to continue to focus on.
-- Amy Calistri
P.S. -- If you haven't done so, you can learn more about my
income investing advisory, The Daily Paycheck. In the past year,
I've collected more than $16,000 in dividends. Learn more about how
you can do the same thing by visiting this link.
Amy Calistri owns shares of BGT.StreetAuthority LLC owns shares
of BGT, PAYX in one or more if its "real money" portfolios.
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