(Bloomberg) -- While Treasuries have bounced back after 10-year yields grazed the 3 percent mark last week for the first time in four years, expectations are mounting that higher rates will soon be the new normal.
Here’s a rundown of what assets stand to suffer in the new regime.
The S&P 500 Index has had a moderately positive correlation with the 10-year yield for most of the time since 2000, though a look beneath the surface shows a sharp divergence among sectors. Utilities look to be most at risk, going by the XLU exchange-traded fund. It’s had a correlation of around -0.3 with 10-year yields for the past six months. If rates resume their upward march, the power companies could head the opposite direction.
Real-estate firms with high payouts have also served as bond proxies, so continued weakness in Treasuries would likely see investors flee from REITs. The correlation between the 10-year and the S&P 500 Real Estate Sector GICS Index went to -0.5 in February 2017, and now sits around -0.1.
While gold has been negatively correlated with yields for years, the magnitude has been coming in for several months now. So while the correlation hit -0.6 in late September, it’s now less than -0.2.
Silver’s chart doesn’t look much different, with the correlation now at -0.15.
Emerging-market bonds could really take a hit -- their correlation with the 10-year yield as measured by the ETF with ticker EMB is at -0.13 right now, but spent some time below -0.60 in 2017.
Higher-duration junk bonds are exposed to risk from rising 10-year yields, so they could take a hit. Rising rates also boost the appeal of investment-grade corporate bonds at least for the time being, according to Hans Mikkelsen, high-grade bond strategist at Bank of America Merrill Lynch.
It’s a different story, however, for leveraged loans and municipal bonds. Three percent is a sweet spot for leveraged loans, which have coasted higher on a demand-supply imbalance. And as Treasuries rise, municipal investors will likely earn higher yields on new state and local debt -- a potential draw to buyers, even though the value of any bonds they currently hold will decline.
Indicators from the broader economy could also be in focus. These could be somewhat interesting because they haven’t necessarily had a negative correlation with Treasury yields in recent months as the economy has grown, stocks have risen and consumer confidence has climbed -- but could also reverse quickly if signs of strain develop.
“Housing and autos, credit card usage and business loans I’m all watching closely” in the context of potential higher rates, Bleakley Financial Group LLC Chief Investment Officer Peter Boockvar wrote in an email Monday.
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