Rising rate worries are bothering investors since the start of this year. Higher inflationary expectations and upbeat economic growth have already driven the benchmark treasury yields to 3%. The yields went on to score even higher on May 15 to touch the highest level in seven years at 3.08%.
Apparently, a strong retail sales report led to the recent spike in bond yields. Plus, San Francisco Fed president John Williams’ comment that he sees three or four rate hikes in 2018 as being in the "right direction" pushed up bond yields. Traders have priced in a 100% chance of a June rate hike and a 54% chance of three more U.S. rate hikes this year. Notable, the Fed enacted a 25-bp hike in March.
Also, trade tensions between the United States and China are yet to be resolved. If both countries fail to come to a deal, a full-blown trade conflict is likely to push up prices and inflation, which would be a negative for the bond market. If this was not enough, a member of the ECB’s governing council recently commented that the conclusion of its asset purchases is imminent, which pushed up bond yields in the Euro zone too.
While the stock market will mostly likely continue to be volatile in the coming weeks as investors try to reposition their portfolios, this may be the right time to look at which sectors and related stocks are likely to emerge winners and losers in the rising rate environment.
Banks are in the best position to benefit in the current environment of rising longer-term rates and steepening yield curve. Since banks borrow money at short-term rates and lend the capital at long-term rates, the latest spike in long-term bond yields bode well for bank stocks.
Civista Bancshares Inc. (CIVB - Free Report)
It is a bank holding company involved in the business of community banking, through its subsidiaries. The stock has a Zacks Rank #1 (Strong Buy). It comes from a top-ranked (top 12%) Zacks industry.
Consumer discretionary stocks should perform well as the labor market showed clear signs of strengthening. Further, a rising housing market and a steady stock market added to the “wealth effect”, which in turn gave a boost to consumer confidence. Tax reform is another positive.
The Buckle Inc. (BKE - Free Report)
The Zacks Rank #1 company is a leading retailer of medium to better-priced casual apparel, footwear and accessories. It belongs to a top-ranked (top 38%) Zacks industry.
High dividend-paying and high-debt sectors like Utilities are likely to underperform. This capital-intensive sector needs huge debt for their operation. As a result, a rising rate environment works inversely for such sectors as companies will have a higher interest obligation. Also, these high-yielding sectors fall out of income-hungry investors’ favor if rates rise.
DTE Energy Company (DTE - Free Report)
The Zacks Rank #4 (Sell) company is a diversified energy company involved in the development and management of energy-related businesses and services nationwide.
REITs are also heavily dependent on debt for acquisitions and development. And higher interest rates raise the debt-financing costs and lower profitability. Also, the appeal for higher payouts by REITs gets quelled in a rising rate environment.
A V Homes Inc.
The Zacks Rank #4 company is into the homebuilding, land development and other real estate operations in Florida and Arizona.
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