The 10-Year Treasury Rate Is Climbing: Here’s How to Profit from It

Shah Gilani|February 25, 2021

I don’t want to burst anyone’s bubble, especially not the everything rally’s party, but the benchmark 10-year Treasury rate is starting to look like the head of a pin.

Bubbling stocks and other inflated asset classes are in danger of popping if rates keep rising, and they sure look like they’re going to keep climbing. But even if the bubble pops, we can still turn a profit, and I’m going to tell you how.

Let’s dive in…

One Year Later… Reading the Benchmark After the Pandemic Panic

The 10-year Treasury yield is the bond market’s benchmark. While the Fed Funds rate gets a lot of attention, because it’s the short-term interbank lending rate the Federal Reserve actively targets, meaning manipulates, the Treasury’s borrowing cost for 10-year loans is what investors watch.

One year ago, February 24, 2020, right before COVID-19 clobbered the country, the yield on the 10-year Treasury bond, or note if you prefer, was 1.34%. A year before that, it was 2.67%.

When markets shuddered under the weight of pandemic panic, the Fed jumped into action, unleashing a flood of liquidity measures to soften the blow from COVID’s dark shadow. The 10-year yield fell from 1.34% in February to 0.54% on March 9, 2020.

Even with equities recovering, then rocketing higher and the economy emerging from the instant recession faster than almost anyone imagined it would, rates remained low. From March through the end of September last year the 10-year rate averaged 0.65%.

That lull ended in October. By November 1, 2020 the yield on the benchmark was 0.88%. By the end of the year, it was 0.93%. By the end of January it was up to 1.11%.

Yesterday, the 10-year yield hit 1.34%.

The Fed hasn’t backed down from buying $80 billion a month of government bills, bonds, and notes. The Fed Funds rate hasn’t moved off the “zero-bound” level the Fed wants it at, which is technically 0.00-0.25%; it was 1.75% before the COVID crash.

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

“It’s the economy, stupid,” as political mastermind James Carville reminded presidential candidate Bill Clinton in 1992. The economy is what matters, and it’s humming along, thank you very much.

With the flood of liquidity drenching every corner of the economy and every market for every asset class, investors are starting to worry that inflation might be right around the corner.

Inflation, which in a nutshell means rising prices, usually follows on the heels of an expanding money supply (which the Fed has engineered like never before) and an expanding economy running smack into each other.

While we’re not “there” yet, we’re only seeing incipient signs of general inflation, investors are reacting to the prospect of inflation down the road, maybe around the corner.

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

None of that is happening right now, but investors and economists and analysts are starting to talk about it and are worried we’ll see inflationary effects as this year continues to see the economy expanding.

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 attract more investors out of equities into safer fixed income alternatives. So, one negative of rising rates could be a stock market selloff.

Another dangerous thing happens when rates rise. Bond investors see prices of their fixed income holdings, especially all those low yielding bonds investors had no choice buying, fall. When rates rise 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.

Back to the 10-year.

The yield on the 10-year Treasury rising rapidly is a function of investors not being eager to buy it, or hold it, if rates are going to rise. By selling 10-year Treasuries, or not buying what the government is issuing, the rate will keep rising. And that rising rate is signaling other investors that inflation may be on the way.

Whether it is or isn’t, I think it’s a few quarters ahead of us, yields are rising and may make a bond selloff and more rising rates self-fulfilling.

If you’re worried about rising rates, you can buy the ProShares UltraShort 20+ Year Treasury ETF (NYSEArca:TBT), which rises as rates rise and bond prices fall. TBT is a leveraged fund which makes it better for trading than long-term holding. It’s been appreciating as rates have been rising on 10-year Treasury notes.

Another way to profit from rising rates is to short or buy put options on the iShares 20+ Year Treasury Bond ETF (NasdaqGS:TLT). It goes down when rates rise.

I’m betting we’re going to see rising rates, and I’m going to play my hand by positioning myself in both TLT and TBT.

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Warm wishes for health, wealth, and happiness,

Shah