How to Go Short on Rate

Soaring yields have taken a toll on rate-sensitive high-yield sectors such as utilities and real estate lately, given their sensitivity to rising interest rates. When interest rates rise, these sectors, which are generally known for the income they generate, fall out of favor as investors could gain similar level of income without taking the stock risk.

In fact, yields surged to the levels not seen in many years. The 10-year yield jumped more than 20 bps over the past week to 3.23%, its highest level since 2011. The 30-year yield rose above 3.43%, its highest level since 2014. The spike came on the back of a spate of upbeat data and hawkish comments from Federal Reserve policymakers (read: Yields Are Soaring: Here’s How to Short Treasury With ETFs).

Unemployment in September fell to 3.7% for the first time in nearly 50 years. The U.S. services sector expanded at its fastest pace on record in September per the data from Institute for Supply Management. The ISM non-manufacturing index also rose to the highest level since the index was created in 2008. The combination of these factors triggered inflation fears and speculation for faster-than-expected rate hikes, pushing bond yields higher. Additionally, the escalating worries over the United States and China’s trade clash could drive inflation higher.

Meanwhile, Jerome Powell said the central bank is “a long way” from getting rates to neutral, a fresh sign of more hikes. He further added that the ultra-accommodative policy to bring the economy out of the Great Recession is no longer needed. The central bank, which started tightening monetary policy in 2015, has raised rates thrice this year and is expected to do so again in December.

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In such a scenario, investors could make a short-term bearish play on the rate-sensitive sectors as these spaces will continue to

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