U.S. equities are bouncing around the unchanged line on Thursday, posting an impressive mid-day rally not on any particular headline but a resumption of the steady bid that has been a hallmark of this post-election meltdown.
The same can’t be said for what’s happening in the bond market. A sea of red marks the carnage as the 30-year Treasury yield pushes above 3% for the first time since early last year and the 10-year yield inches towards 2.8%.
All this comes in the wake of yesterday’s final Federal Reserve policy statement from chairman Janet Yellen — who will step down this weekend — which was surprisingly hawkish in terms of rate hike guidance and inflation expectations. The bond market is taking this to heart, bracing for higher borrowing costs in the weeks and months to come.
While stock investors are largely looking the other way, 3% is widely seen as the threshold at which higher rates will be a drag on equity prices. Here are four ETFs to buy to play the dynamic:
ETFs to Buy: ProShares UltraShort 20+ Year Treasury Bond (TBT)
The ProShares UltraShort 20+ Year Treasury Bond (NYSEARCA:TBT) provides double inverse exposure to the daily price action in long-term Treasury bonds — which put another way, gives you leveraged upside exposure to the rise in interest rates.
The fund is up more than 10% from its mid-December low and it is threatening to break up and out of a multi-month consolidation range going back to May.
Looking back even further, the TBT has been in a dead zone since early 2015 as inflation cooled (as a result of the energy price weakness) and the Fed kept its rate hike pace nice and slow. That’s changing now, with market-derived inflation expectations heating up in a big way.
ETFs to Buy: ProShares UltraShort Real Estate (SRS)
Real estate investment trusts are one of the most yield-sensitive areas of the market since they are attractive largely because of their income-producing qualities. But as bond-like stocks, that makes them more sensitive to the vagaries of interest rate movements, rising and falling to relation to what bond prices are doing.
Right now, as yields rise prices of REITs tend to weaken to keep their dividend yields on par with what risk-free Treasury rates are doing. As a result, the inverse leveraged ProShares UltraShort Real Estate (ETF) (NYSEARCA:SRS) has gained more than 1% from its mid-December low.
ETFs to Buy: SPDR Gold Shares (GLD)
Increasing your precious metals allocation — via an ETF like SPDR Gold Trust (ETF) (NYSEARCA:GLD), which provides exposure to gold — is an indirect way to play rising interest rates. Because it’s a play on the motivation for said rate increases (higher inflation, higher economic growth). And both are on the rise.
In fact, the Atlanta Fed’s economic tracker currently estimates first quarter GDP growth of 5.4%, which is a breakneck pace at a time of ultra-low unemployment this late in the cycle. Moreover, the recent weakness in the U.S. dollar is a tailwind for gold as well.
ETFs to Buy: Capital Markets ETF (KCE)
Another indirect way to play higher interest rates is via the SPDR S&P Capital Markets ETF (NYSEARCA:KCE), which gives exposure to capital market banks like Goldman Sachs Group Inc (NYSE:GS) that benefit not only from higher loan rates (increasing net interest margins) but also from the trading volatility in fixed income. You’ll remember that recent earnings calls have been marred by disappointing performances from Wall Street’s FICC divisions (fixed-income, currencies, and commodities).
The KCE is up 1% on Thursday, rallying back above its 20-day moving average, and it is up 14% from its October-November trading range.