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What's Happening With Interest Rates?

8 February 2013 in Trading Ideas

Few topics can stir the pulse of investors quite the way that interest rates can — their movements affect the economy with a power few indicators possess. While interest rates have been at historic lows, the topic has generated new attention in recent weeks.

Rates on 10-year Treasury bonds have snuck upwards during the past few weeks to the neighborhood of 2%. That’s after dropping below 1.5% during the summer of 2012. The 10-year bond rate is closely watched, because it directly affects mortgage rates, consumer loan rates and the like. The rate’s long term average is 6.63%.

Then, last month, noted financier George Soros made headlines when he predicted that interest rates would spike this year1. This would occur, said Soros, because the U.S. economy would recover more quickly than the Federal Reserve Bank assumed in its statements about keeping rates low. Growing economies are often associated with rising interest rates, Soros noted.

The Rising Interest Rates motif is designed to track institutions that do well when rates move upwards. Custodian banks and brokerage houses are in that category, on account of the increased interest income they earn on their substantial cash balances. Stocks from custodian banks and brokerage houses comprise 85% of the Rising Interest Rates motif, which has returned 21.1% in the past year.