How To Profit Off Rising Interest Rates

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Includes: DPST, TBT, TMV, XLF
by: CapitalMarketsGuy

Summary

Quick recap of fixed income and equity market performance over the past week.

We will examine how small investors can position for a rising interest rate environment.

Finally, specific ETFs that can help you profit with rising interest rates.

Risk markets are flat this week as risk off sentiment rises as geopolitical tension around Syria increases and the "Trump Trade" fades. Fed policy and economic indicators dominate both fixed income and equity headlines.

The March FOMC minutes were most notable for what they revealed about the Committee's early thinking on balance sheet normalization.

The minutes for the March FOMC meeting released this week had somewhat hawkish implications, suggesting that most Committee members agreed that it would be appropriate to start its balance sheet normalization process later this year. Moreover, they preferred to either cease or phase out reinvestment of both Treasuries and MBS.

In addition, while Friday's nonfarm payrolls were somewhat weaker than expected, we think the unexpected 0.2% drop in the unemployment rate to 4.5% was the more meaningful surprise given it means unemployment has already reached the Fed's year-end forecast.

The big take away from all this is that the Fed has slated four tightening for 2017, three in terms of rate increases and one in terms of balance sheet roll off. All four will provide upwind to treasury yields.

  • Long-end Treasury yields declined this week, likely driven by recent weakness in survey data
  • Markets are underpricing Fed forecasts, yields are near the low end of their YTD ranges, and the significant short base held by investors earlier this year has largely been unwound

So, how can small investors benefit from rising interest rates?

Bear bond ETFs such as the Direxion Daily 20+ Year Treasury Bear 3x Shares ETF (NYSEARCA:TMV) or the ProShares UltraShort 20+ Year Treasury ETF (NYSEARCA:TBT) as well as pro-bank ETFs like the Financial Select Sector SPDR ETF (NYSEARCA:XLF) or the Direxion Daily Regional Banks Bull 3x Shares ETF (NYSEARCA:DPST) will benefit in a rising interest rate environment.

Disclosure: I am/we are long TMV, DPST.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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