Do This To Profit When Interest Rates Spike

As the demand for money increases, rates rise because banks can charge more for loans. The cost of money is reflected in interest rates. 

And that has an impact.  

When Rates Rise, Lots of Things Happen

For investors, the choice of putting money in equities versus bonds or fixed–income investments gets upended. Higher rates tend to lure more investors out of equities and into safer fixed–income alternatives. So, despite the fact that the economy is expanding, one drawback of rising rates could be a stock market sell–off. 

Another dangerous thing happens when rates rise. Bond investors see the prices of their fixed–income holdings, especially all those low–yielding bonds investors bought (because they had no choice), begin to fall. When rates rise and prices fall, the relationship is said to be “inverse.” Prices of existing fixed–income investments fall because investors sell them to buy new, higher–yielding paper. 

That takes us back to the 10-year notes. The yield on these Treasuries rises rapidly as a function of investors not really wanting to buy or hold it, if rates are going to rise. By selling 10-year bonds, or at least not buying what the government is issuing, the rate will keep rising, which, in turn, signals to other investors that inflation may be in the mail.  

Now, to be perfectly clear, none of that is happening right now, but economists and analysts are starting to talk about it. Investors can hear this, and they’re worried we’ll see inflationary effects this year as the economy continues expanding.  

For investors right now, there’s a tension between the improving economy and the prospect of the end of the pandemic – all good – and the risks of inflation – not so good.  

It’s like a pendulum.  

We saw that swing in action yesterday to the upside. 10-year Treasury yields remained above 1.4%, but stocks enjoyed a nice, broad rally as hopes for a recovery and warm, fuzzy thoughts of stimulus banished the inflation boogeyman – at least for the session. 

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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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