The S&P 500 is up 11% year-to-date. But there is another rally that is getting less attention: U.S. Treasury yields have been on the rise.
Short-term Treasury yields have inched up throughout 2012, while longer-term Treasuries have bumped up only in recent weeks.
Of course, interest rates are still well below where they were before the financial crisis. At the start of 2008, the 10-year Treasury yield was 3.9%, compared with 2.25% today.
Interest rates have been on a downward slide for nearly five years. The most significant descent started in 2008 when the Federal Reserve cut the federal funds rate to effectively zero. In fact, rates have been low for such a long time, borrowers have gotten a bit complacent.
There has been little urgency to borrow at low rates because, up until now, there has been no penalty for waiting. To some extent, a little bump in rates might do more good than harm to the economy. For example, the threat of even slightly higher mortgage rates might do a lot to get potential home buyers off the sidelines. Likewise, corporations might decide to borrow more now, locking in low rates before they rise.
Of course, the rise in rates may be a short-term phenomenon. Hedge-fund managers, however, are betting that it is the start of a bona fide trend. Believing yields might go even higher, hedge funds and other large investors sold 78% of their holdings of two-year Treasury futures the week ended March 13, according to a Bank of America/Merrill Lynch report. The same report noted that big money managers tripled their short positions against 10-year Treasuries.
I'll be keeping a close eye on this potential trend. But if rates continue to trend higher as they have in the past few weeks, a few companies will be winners...
Banks: Banks will still be able to borrow money at rock-bottom rates, but may be able to issue new home, consumer, and corporate loans at higher rates.