Trade idea of the day how to benefit from rising US yields

Earlier this week, following the release of the FOMC January meeting minutes, US bond yields touched fresh 4-year highs of 2.94%. The bond market interpreted the minutes as having a more hawkish tone, with upgrades to economic growth forecasts meaning more aggressive monetary policy tightening.

What: 

Earlier this week, following the release of the FOMC January meeting minutes, US bond yields touched fresh 4-year highs of 2.94%. The bond market interpreted the minutes as having a more hawkish tone, with upgrades to economic growth forecasts meaning more aggressive monetary policy tightening. 

Whilst the Base case scenario has been 3 rate rises across 2018, there is a growing acceptance that there could be 4 rate rises through the year. 

As the market increases its interest rate expectations for the US, US 10-year treasury bond yields rally. More recently rising bond yields have triggered traders to sell out of stocks on the fear that higher interest rates will drag down the whole market. 

But this isn’t often the case, there are certain stocks that perform well when yields rise and there are other that perform badly when interest rate expectations increase. 10-year treasury yields have steadily been climbing higher over the last 6 months and look to be targeting the important psychological level of 3%. 

 As bond yields rise, stocks which are typically held for their high dividends tend to decline. 

The reason behind this is because investors will typically consider a treasury to be a safer substitute for income than a dividend stock. Looking at the Dow, Proctor & Gamble and Coca-Cola are 2 stocks often held for their high dividends. 

Over the past 6 months, during which bond yields have been increasing Proctor & Gamble has lost over 12% of its value, whilst Coca-Cola has lost 4%. Overt he same period the Dow has rallied 14%. On the S&P a similar theory holds. 

Utilities are considered a bond proxy. The S&P Utilities sector has dropped 10%, whilst the S&P500 has gained 1.4% over the same period.  

How: 

If you believe that interest rate expectations in the US will continue increasing, shorting one of Proctor & Gamble, Coca-cola or a Utility firm from the S&P could be a good alternative way to capitalise on rising yields.

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