Liz Looks at: Rate Implications

Hypersensitive or Hyperparanoid?

We’re obsessed with rates. Sovereign bond rates, policy rates, the direction of rates, and the rate of change in rates.

Are we overhyping the topic? Can we glean any definitive investment guidance on how to position our portfolios based on it?

Just Can’t Get Enough…of the 10-Year?

As U.S. investors, when we talk about “rates” we’re usually talking about the 10-year Treasury yield. It’s largely viewed as a barometer for long-term economic growth and inflation — a gauge for investors as they try to decide what lies ahead.

At least, that’s what it used to be.

It’s still a barometer, but with the Fed currently absorbing 60% of net Treasury issuance, and the fact that our 10-year sovereign bond yields more than many developed sovereigns, Treasurys are attracting foreign buyers at unprecedented levels. There’s also plenty of domestic demand for Treasuries from large institutions that need to manage liabilities and risk.

In fact, the 10-year Treasury auction in August had a bidder participation rate (a measure of appetite for Treasurys excluding the Federal Reserve) of 90.3%–the highest ever. The auction just conducted yesterday had a bidder participation rate of 87.7%–the second highest ever. For reference, the average since the Fed began purchasing assets in Nov. 2008 is 64.7%.

That level of demand keeps a lid on yields, and a lid on yield volatility. And since it’s demand outside the Fed, even when tapering begins, the lid may loosen, but stay on the jar.

Bottom line: movements in the 10-year yield and its absolute level cannot be viewed as direct reflections of economic expectations or monetary policy action.

Calling Sectors Friends or Foes

But can the 10-year yield be used as an indicator of sector winners and losers? Typically, we’d expect financials to do well in a rising rate environment, but the question is how well?

From Nov. 2008, when quantitative easing (QE) began, through today, we found 16 periods when the 10-year yield moved meaningfully up or down (a move of 1.3% to 1.5%). Admittedly, this is a small sample size, but it was important to isolate the QE regime.

We found, unsurprisingly, that when yields rose, financials beat the S&P 500 by an average of 7.4%. When yields fell, financials underperformed the S&P 500 by an average of 8.4%.

But, surprisingly, during the same periods, when yields rose, technology also beat the S&P 500 by 8.7% (and beat it by 4.4% when yields fell). But aren’t rising rates supposed to be bad for technology? Maybe not under this policy regime.

Survey Says: Hyperparanoid

We’re obsessing too much. Rates matter, but they shouldn’t drive too much of your allocation decisions and they can be a poor indicator of equity market behavior. Even though I believe the 10-year yield will move higher through the rest of the year, it probably won’t happen in a straight line. Instead of focusing so much on rates, I think we can be better served by focusing on economic growth, corporate fundamentals, and the state of the global consumer.

-Liz Young Thomas, Head of Investment Strategy at SoFi

Things are changing daily within the financial world. Sign up for the SoFi Daily Newsletter to get the latest news updates in your inbox every weekday.

Sign up

Please understand that this information provided is general in nature and shouldn’t be construed as a recommendation or solicitation of any products offered by SoFi’s affiliates and subsidiaries. In addition, this information is by no means meant to provide investment or financial advice, nor is it intended to serve as the basis for any investment decision or recommendation to buy or sell any asset. Keep in mind that investing involves risk, and past performance of an asset never guarantees future results or returns. It’s important for investors to consider their specific financial needs, goals, and risk profile before making an investment decision.
The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. These links are provided for informational purposes and should not be viewed as an endorsement. No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this content.
Communication of SoFi Wealth LLC an SEC Registered Investment Adviser
SoFi isn’t recommending and is not affiliated with the brands or companies displayed. Brands displayed neither endorse or sponsor this article. Third party trademarks and service marks referenced are property of their respective owners.
Communication of SoFi Wealth LLC an SEC Registered Investment Adviser. Information about SoFi Wealth’s advisory operations, services, and fees is set forth in SoFi Wealth’s current Form ADV Part 2 (Brochure), a copy of which is available upon request and at Liz Young Thomas is a Registered Representative of SoFi Securities and Investment Advisor Representative of SoFi Wealth. Her ADV 2B is available at

All your finances.
All in one app.

SoFi QR code, Download now, scan this with your phone’s camera

All your finances.
All in one app.

App Store rating

SoFi iOS App, Download on the App Store SoFi Android App, Get it on Google Play

Liz Young Thomas ABOUT Liz Young Thomas Liz Young Thomas is SoFi's Head of Investment Strategy, responsible for building out the function and providing economic and market insights. Prior to joining SoFi, Liz was the Director of Market Strategy at BNY Mellon Investment Management where she formulated and delivered views on macroeconomic themes and their effects on capital markets. Earlier in her career, she was a due diligence analyst at Robert W. Baird and a research analyst at BMO Global Asset Management. Liz is passionate about educating others on markets and investing in order to help people feel empowered to take a more active role in their financial futures.

TLS 1.2 Encrypted
Equal Housing Lender