The Federal Reserve last cut interest rates on September 18 – just one day after the yield on the 10-year U.S. Treasury hit a yearly low of 3.6%.
That yield has moved in a nearly vertical pattern since. And this week, it’s back above 4.33%.
Most would’ve anticipated interest rates falling after the 50-basis-point (0.5%) rate cut. Plus, the central bank made it clear that it would likely continue lowering rates into next year. But the opposite has occurred…
The sectors that typically do well in a low-interest-rate environment – like utilities, consumer staples, commodities – began rallying mid-year in anticipation of the Fed starting its rate-cut cycle. But they’ve pulled back from their highs since September as rates have kept rising.
At this point, I don’t see much more upside left for yields.
Sure, there’s momentum behind them to keep moving higher as bonds fall. (Bond prices have an inverse relationship with yields.) But make no mistake that the Fed is set on lowering interest rates in the foreseeable future. This will lead to bonds becoming more attractive, which will put pressure on the yield rally.
That doesn’t mean there aren’t ways to profit, though…
A few sectors stand to benefit from interest rates turning down again – including biotech, small caps, and homebuilders. As you can see in the chart below, all three have lagged the overall market. And that underperformance is creating a solid entry point for opportunistic investors.
The biotech sector in particular will benefit from lower interest rates because they allow these companies to borrow cash at lower rates. The same can be said for small caps, which often rely on borrowing money to fund early-stage growth.
Lower rates can also help boost housing stocks by reducing mortgage rates. More affordable homes on the market will eventually lead to larger demand for homes.
Plenty of other sectors could surge higher as interest rates fall back to the yearly lows. You can be sure I’ll be watching closely to see how it all plays out.
Here’s to the future,
Matt McCallEditor, Market Insights
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