RSSWatch Those ETFs As the Interest Rates Rise
By Tom Lydon | January 07, 2010 | 12:24 PM | 0 Comments
\Now that the worst of the financial crisis appears to be in our rearview mirrors, we're all wondering what the economy's next chapter is going to be, and how we can best cope. Will the Federal Reserve hike interest rates? Many believe so, especially as the economy continues to make improvements.
Once the Fed decides to rein in its cheap lending and start raising interest rates, the yield spread will probably narrow, since the 2-year note yields will have to play catchup, says Peter Cardillo, chief market strategist at Avalon Partners. Betting on an expanding economy and rising inflation, investors are selling long-term bonds, which have sent prices lower and yields higher - Treasury prices and yields move inversely with each other.
When the spread of the interest rates between the two notes widens, or the yield curve rises, it usually means that the economy is recovering. A narrowing or negative spread is an ominous omen. The yield curve steepens when the Federal Reserve reduces interest rates to stimulate the economy.
The yield curve is also good for banks, which borrow at short-term rates and lend at long-term rates. This translates to more profits and, ultimately, more free-flowing credit.
If rates rise, look for the following events to potentially occur and ETFs to play them:
- The dollar would get stronger - play it with the PowerShares DB U.S. Dollar Bullish (NYSE: UUP)
- Banks start doing better - play it with the Financial Select Sector SPDR (NYSE: XLF)
- Long-term Treasuries will suffer a blow - ProShares Short 20+ Year Treasury (NYSE: TBF)
- Short-term Treasuries should fare better - Vanguard Short-Term Bond (NYSE: BSV)
- Consumer staples will likely stay stable - Consumer Staples Select Sector SPDR (NYSE: XLP)
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