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5 ETFs to Benefit From Treasury Yield Surge

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Rates have been rising fast in the United States over the past few weeks on growing risk appetite and reflationary optimism. First, vaccine distribution has given a material boost to the U.S. treasury yields.

And then hopes that President Joe Biden will be able to inject more fiscal stimulus (thanks to the Democratic control over Senate) have been pushing long-term rates even higher. Meanwhile, the Fed has remained dovish as the job market is yet to heal.

The 10-year U.S. Treasury yield rose above 1.3% for the first time in nearly a year on Feb 16. The benchmark yield, reached 1.309%, its highest level since Feb 27, 2020, when the coronavirus pandemic just started impacting the investing world.

In fact, the 10-year Treasury yield marked the biggest daily jump (up by 10 bps) in more than three months. The 30-year U.S. yield also rose, touching a one-year high of 2.095% on Feb 16.

President Joe Biden plans to take his case for a $1.9-trillion stimulus plan directly to the U.S. public on his first official trip outside of Washington since becoming president. The move is probably to persuade Congress in sealing the stimulus deal on his terms.

Notably, Republicans on Capitol Hill are not in full support of Democrats’ proposed relief package, which includes “$1,400 cheques for individuals, extra funding for unemployment benefits, an increase in child tax credits and aid to state and local governments.”

Against this backdrop, yield curve spurted to reflect an inflationary backdrop. A rise in energy prices has also led to rising inflationary bets. Below we highlight a few ETFs that might gain ahead.


SPDR S&P Bank ETF (KBE - Free Report)

Yield curve steepened materially. As of Feb 16, spread between the yield on the benchmark U.S. treasury and the yield on the two-year treasury was 117 basis points. Notably, this spread was 98 bps at the start of the month.

The biggest winner of the steepening yield curve is the banking sector. Bargain hunting also added some gains. As banks seek to borrow money at short-term rates and lend at long-term rates, a steepening yield curve will earn more on lending and pay less on deposits, thereby leading to a wider spread. This will expand net margins and increase banks’ profits.

SPDR Portfolio S&P 500 Value ETF (SPYV - Free Report)

Value stocks tend to perform better in a rising rate environment.  Moreover, financials are the largest part of the value index. This clearly explains why the value index normally outperforms in a rising rate environment (read: Value or Growth: Which ETFs to Play Ahead?).

Invesco DB US Dollar Index Bullish Fund (UUP - Free Report)

The greenback has touched a four-month high against the yen as U.S. bond yields jumped. The New York Federal Reserve’s Empire State manufacturing report offered an upbeat economic picture, with a rise in its “prices paid index” giving cues of faster inflation. No wonder, the greenback is due for a rally against such a backdrop.

iShares Russell 2000 ETF (IWM - Free Report)

Rising rates add strength to the U.S. dollar. This is going to favor small-cap stocks which are more domestically exposed. Since these companies do not have much exposure to the international markets, a higher greenback does not bother their profitability.

ProShares Short 20+ Year Treasury (TBF - Free Report)

The ProShares Short 20+ Year Treasury seeks daily investment results, before fees and expenses, that correspond to the inverse of the daily performance of the ICE U.S. Treasury 20+ Year Bond Index. Since rising rates weigh on bond prices, such inverse bond ETFs should offer investors hefty gains.

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