Do This To Profit When Interest Rates Spike

Rates were still historically low; from March through the end of September 2020, 10-year note yields averaged just 0.65%. But that crept up and up over the months that followed; 0.88% by Nov. 1, 0.93% by the end of December 2020, and, by the end of January 2021, it was up to 1.11%. 

Last week, lots of “pandemic stocks” sold off and “recovery stocks” rose, and yields briefly hit a 12-month high of more than 1.6%. Just yesterday morning, the 10-year yield hit 1.45% before settling down a bit. 

But the Fed certainly hasn’t backed off its $80 billion monthly buying binge of government bills, bonds, and notes. The Fed Funds rate hasn’t moved off the “zero bound,” either. That zero bound is technically 0.00% to 0.25%. Compare that to 1.75% before the COVID-19 crash.  

So, why’s the Treasury 10-year yield up lately?  

Here’s Why Rates Are Higher Now

As political mastermind James Carville reminded presidential candidate Bill Clinton back in 1992… “It’s the economy, stupid.”  

As in, the economy’s humming along nicely, thank you very much. We’ve seen money pour into energy, travel and leisure, metals, cyclical stocks – all indications of a strengthening economy.

At the same time, there’s a flood of liquidity drenching every sector of the economy, and every corner of every market for every asset class. So, naturally, investors are starting to worry that inflation might be right around the corner.  

On paper, it’s not an unreasonable fear. 

Inflation, in a nutshell, means rising prices. Those usually follow on the heels of an expanding money supply. Rising prices and an expanding economy run smack into each other, with troublesome results. And to say the Fed is “expanding the money supply” is like saying “the Grand Canyon is a ditch.”   

One manifestation of inflation, or, sometimes, just the anticipation of inflation, is rising rates. When prices rise, things cost more, so workers demand higher wages to pay for them. The more money workers have to spend, the more producers of goods and services can charge, hence more rising prices.  

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Disclaimer: Any performance results described herein are not based on actual trading of securities but are instead based on a hypothetical trading account which entered and exited the suggested ...

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