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Treasury yields have surged since the start of 2025 due to the Fed’s uncertainty about future rate cuts and inflationary fears caused by Donald Trump’s policies. The 10-year yields climbed above 4.8% — the highest level since November 2023 — and are heading toward 5%, a level that might make financial conditions difficult (read: Inverse Treasury ETFs Rallying on Spike in Yields).
This is especially true as higher yields increase borrowing costs for companies and households, thereby leading to slower economic growth. This has made investors cautious about the longevity of the bull run in U.S. equities and has piled up heavy losses for bond investors. However, rising yields will benefit a few corners of the market.
Why Yields Are Surging?
The bouts of upbeat data have cast doubt on further interest rate cuts. The biggest culprit is the blockbuster jobs report. The United States added better-than-expected 256,000 jobs in December and unemployment dropped to 4.1% from 4.2% in November. Meanwhile, U.S. manufacturing activity also showed signs of improvement in the final month of 2024. This is especially true as the Institute for Supply Management (ISM) said its manufacturing PMI increased to 49.3 last month, the highest reading since March, from 48.4 in November. This suggests that production is rebounding and orders are rising, indicating the good health of the economy.
The incoming Trump administration’s policies, including tax cuts and looser business regulations, could add to inflation. The potential approach to impose higher tariffs on China and other nations has heightened investor caution, particularly ahead of the Jan. 20 inauguration.
Winners
Financials
The financial sector, particularly banks, tends to benefit from rising yields due to improved net interest margins. This is because banks seek to borrow money at short-term rates and lend at long-term rates. If interest rates rise, banks would be able to earn more on lending and pay less on deposits. This will expand net margins and boost banks’ profits (read: 5 Top-Ranked ETFs to Buy Cheap).
SPDR S&P Bank ETF (KBE - Free Report) offers equal-weight exposure to 95 banking stocks by tracking the S&P Banks Select Industry Index. Regional banks dominate the portfolio with a 70.9% share, while diversified banks, commercial & residential mortgage finance, diversified financial services and asset management & custody banks take the remainder. SPDR S&P Bank ETF has amassed $2.3 billion in its asset base while trading in a heavy volume of 2 million shares a day, on average. The product charges 35 bps in annual fees and has a Zacks ETF Rank #2 (Buy).
Energy
The energy sector historically performs well during periods of rising yields, especially if they coincide with inflationary trends. Higher economic activity often drives up energy demand, lifting commodity prices and boosting revenues for oil and gas companies.
Energy Select Sector SPDR (XLE - Free Report) could be a compelling choice to play the trend. It is the largest and the most popular ETF in the energy space, with an AUM of $33.7 billion and an average daily volume of 12 million shares per day. It offers exposure to the broad energy space and follows the Energy Select Sector Index. Energy Select Sector SPDR holds 22 securities in its basket, with a higher concentration on the top two firms. Energy Select Sector SPDR charges 9 bps in annual fees and has a Zacks ETF Rank #2.
Ultra Short-Term Treasury Bonds
Rising yields directly benefit Treasury bond ETFs, particularly those targeting short-duration bonds. Ultra Short-duration bond ETFs invest in securities with durations of less than one year, thus making them less vulnerable to rising rates. As the duration or interest rate sensitivity is lower, these act as a cushion against rising rates.
While there are many options in this space, JPMorgan Ultra-Short Income ETF (JPST - Free Report) primarily invests in a diversified portfolio of short-term, investment grade fixed- and floating-rate corporate and structured debt while actively managing credit and duration exposure. It holds 853 bonds in its basket with a duration of less than one year. JPMorgan Ultra-Short Income ETF has AUM of $28.3 billion in its asset base while trading in a good volume of around 6.6 million shares a day. It charges 18 bps in annual fees.
Floating Rate Bonds
Floating rate bond ETFs are designed to perform well in rising yield scenarios. These funds invest in debt instruments with interest rates that adjust periodically, ensuring that income levels remain competitive as rates rise. iShares Floating Rate Bond ETF (FLOT - Free Report) is the most popular option in this space with AUM of $7.8 billion and an average daily volume of 1.2 million shares (read: ETF Strategies to Play Amid Rising Treasury Yields).
iShares Floating Rate Bond ETF offers exposure to U.S. floating rate bonds, whose interest payments adjust to reflect changes in interest rates. It follows the Bloomberg US Floating Rate Note < 5 Years Index and holds 392 securities in its basket. It has an average maturity of 1.77 years and an effective duration of 0.02 years. iShares Floating Rate Bond ETF charges 15 bps in annual fees.
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ETFs Set to Benefit From Rising Yields
Treasury yields have surged since the start of 2025 due to the Fed’s uncertainty about future rate cuts and inflationary fears caused by Donald Trump’s policies. The 10-year yields climbed above 4.8% — the highest level since November 2023 — and are heading toward 5%, a level that might make financial conditions difficult (read: Inverse Treasury ETFs Rallying on Spike in Yields).
This is especially true as higher yields increase borrowing costs for companies and households, thereby leading to slower economic growth. This has made investors cautious about the longevity of the bull run in U.S. equities and has piled up heavy losses for bond investors. However, rising yields will benefit a few corners of the market.
Why Yields Are Surging?
The bouts of upbeat data have cast doubt on further interest rate cuts. The biggest culprit is the blockbuster jobs report. The United States added better-than-expected 256,000 jobs in December and unemployment dropped to 4.1% from 4.2% in November. Meanwhile, U.S. manufacturing activity also showed signs of improvement in the final month of 2024. This is especially true as the Institute for Supply Management (ISM) said its manufacturing PMI increased to 49.3 last month, the highest reading since March, from 48.4 in November. This suggests that production is rebounding and orders are rising, indicating the good health of the economy.
The incoming Trump administration’s policies, including tax cuts and looser business regulations, could add to inflation. The potential approach to impose higher tariffs on China and other nations has heightened investor caution, particularly ahead of the Jan. 20 inauguration.
Winners
Financials
The financial sector, particularly banks, tends to benefit from rising yields due to improved net interest margins. This is because banks seek to borrow money at short-term rates and lend at long-term rates. If interest rates rise, banks would be able to earn more on lending and pay less on deposits. This will expand net margins and boost banks’ profits (read: 5 Top-Ranked ETFs to Buy Cheap).
SPDR S&P Bank ETF (KBE - Free Report) offers equal-weight exposure to 95 banking stocks by tracking the S&P Banks Select Industry Index. Regional banks dominate the portfolio with a 70.9% share, while diversified banks, commercial & residential mortgage finance, diversified financial services and asset management & custody banks take the remainder. SPDR S&P Bank ETF has amassed $2.3 billion in its asset base while trading in a heavy volume of 2 million shares a day, on average. The product charges 35 bps in annual fees and has a Zacks ETF Rank #2 (Buy).
Energy
The energy sector historically performs well during periods of rising yields, especially if they coincide with inflationary trends. Higher economic activity often drives up energy demand, lifting commodity prices and boosting revenues for oil and gas companies.
Energy Select Sector SPDR (XLE - Free Report) could be a compelling choice to play the trend. It is the largest and the most popular ETF in the energy space, with an AUM of $33.7 billion and an average daily volume of 12 million shares per day. It offers exposure to the broad energy space and follows the Energy Select Sector Index. Energy Select Sector SPDR holds 22 securities in its basket, with a higher concentration on the top two firms. Energy Select Sector SPDR charges 9 bps in annual fees and has a Zacks ETF Rank #2.
Ultra Short-Term Treasury Bonds
Rising yields directly benefit Treasury bond ETFs, particularly those targeting short-duration bonds. Ultra Short-duration bond ETFs invest in securities with durations of less than one year, thus making them less vulnerable to rising rates. As the duration or interest rate sensitivity is lower, these act as a cushion against rising rates.
While there are many options in this space, JPMorgan Ultra-Short Income ETF (JPST - Free Report) primarily invests in a diversified portfolio of short-term, investment grade fixed- and floating-rate corporate and structured debt while actively managing credit and duration exposure. It holds 853 bonds in its basket with a duration of less than one year. JPMorgan Ultra-Short Income ETF has AUM of $28.3 billion in its asset base while trading in a good volume of around 6.6 million shares a day. It charges 18 bps in annual fees.
Floating Rate Bonds
Floating rate bond ETFs are designed to perform well in rising yield scenarios. These funds invest in debt instruments with interest rates that adjust periodically, ensuring that income levels remain competitive as rates rise. iShares Floating Rate Bond ETF (FLOT - Free Report) is the most popular option in this space with AUM of $7.8 billion and an average daily volume of 1.2 million shares (read: ETF Strategies to Play Amid Rising Treasury Yields).
iShares Floating Rate Bond ETF offers exposure to U.S. floating rate bonds, whose interest payments adjust to reflect changes in interest rates. It follows the Bloomberg US Floating Rate Note < 5 Years Index and holds 392 securities in its basket. It has an average maturity of 1.77 years and an effective duration of 0.02 years. iShares Floating Rate Bond ETF charges 15 bps in annual fees.