WINNERS, LOSERS IN RATE SHIFTS

Investors who forgot what to do when interest rates rise might be due for a refresher course.

Sharp swings in interest rates can be a major market shock that crowns new winners and punishes companies on the wrong side of the shift. After 30 years of falling interest rates that included a stretch at record lows, a change is underway.

The yield on the benchmark 10year Treasury note has jumped from 1.6% in late May to 2.13% as signs of a better economy shifted focus to when the Federal Reserve will start paring back its bond- buying program and other easy- money policies — pushing interest rates even higher.

Rising rates are a giant wild card for investors, because the reasons can be so varied and the stock market reaction so unpredictable, says Ken Winans of Winans Investments: “Every time you have rising rates, you have different groups getting hit for different reasons.”

The rise so far is not enough to spark alarm, but it has savvy investors looking for areas that might be vulnerable or could benefit if the trend continues. Possible fallouts:

Bond- like investments lose big. Investments known for safety and income are at risk. During the past 50 weeks, the 10- year Treasury yield has risen by more than onetenth of a percentage point 11 different times, says Jack Ablin of Harris Private Bank. The worst- performing asset classes during those rises have been preferred stocks and real- estate investment trusts, Ablin says. Utilities also have been hit hard.

Economically sensitive industries benefit. If the rise in interest rates is gradual, it can be viewed as a vote of confidence for the economy. As a result, in those 11 instances the past 50 weeks, the big winners have been financial services and materials stocks, Ablin says, both of which thrive in a strong economy.

Companies making necessities hold up better. The last period of sharply rising rates was between January and June of 1994, when the 10- year Treasury yield rose from 5.75% to 7.8%, says Sam Stovall of S& P Capital IQ. Investors focused on food, clothing and shelter. Home improvement retail, health care distributors and personal products makers did best, up 8.9%, 6.2% and 6.1%, while the broad market fell about 5%.

But while rising rates are something for investors to watch, it’s too soon to worry, Winans says. A gradual increase isn’t as much of a problem as a sudden jump higher, he says. Before rates cause serious problems, “They don’t just need to climb, but climb too far and too fast,” he says.