What to hold, what to fold in a falling rate environment

Please note that this is my only blog this week. I’m at the cottage as you read this. Beer. Bikes. Barbeque. I won’t be able to post or respond to your comments until next week.

Fed-talk of lower rates, an inverting yield curve, combined with investors suddenly realizing that there is risk in the stock market (You mean there is risk in stocks??? Say it aint so!!!!) have helped both the US bond market, and Canadian bond market. As I noted on my last blog , futures are suggesting that the US Fed is expected to raise by at least 100 bps by year end. So what should we hold, and what should we avoid in this environment?


Falling rate positives

Rising bonds/ falling rates can have positive impact on some sectors, and negative on others. Take the US and Canadian REITS. They benefit from a weak stock market (risk-off) and declining rates (cheaper borrowing costs). Note the rally on these sector ETF’s that coincides with the bond rally.

Telco’s and utilities do well in a falling rate environment, given their falling debt servicing costs. While the CDN Telco’s have largely been flat, one standout (BCE) has held the fort. Utilities, on the other hand, have been positively affected on a broad scale in both countries. Note the strong XLU ETF chart below.

Insurance is a sector that falling rates are typically positive for. Bond market strength helps their bond portfolios. However, the recent bond rally/rate decline has NOT helped the insurance sector much, as can be seen on the KIE ETF

Same goes with the technology sector. Lower rates typically allow for further R&D and investment as a tech firms borrowing costs decline. The XLK ETF does not seem to be paying heed to this tendency of late.


Falling rate negatives

 Cyclicals can be negatively impacted by lower rates. Lower rates imply a weaker economy. As such, cyclicals that rely on stronger economic times suffer, making it likely that their stocks would suffer.

Industrials are one type of cyclical that, as can be seen on the XLI ETF chart, have suffered greatly in the current strong bond market.

So too are certain commodities—again though, more focused on the cyclical side of this group. Copper, oil, agricultures come to mind. I could print a chart for each of these commodities and you’d see the same pattern – but I thought I’d post copper as the best example- given its importance as an industrial metal. Copper has struggled as interest rates fell, but does seem to be catching a bid at support lately.

A strong bond market and falling rates has negatively affected US and Canadian banks. Falling rates make for less profit and tighter margins when lending for the banks. Note the recent pullback coinciding with the rising bond markets. Adding insult to injury, there is some tie-in with an executive of one of the CDN banks with the most recent Canadian political scandal. This being the second scandal for the current PM – now on record as the only PM in Canadian history to get not one…but two full ethics violations/ reprimands. Sorry to the PM’s remaining fans – but yes, corrupt governments DO affect our markets, and I will continue to point this out.  Norman Levine, another Portfolio Manager who I respect, has pointed out similar thoughts on his twitter feed.

Anyhow – the case for owning banks on either side of the border may be weakening, given rate risk, and (on the CDN side) other potential risks.



Overall, the message is clear that we should seek to add to positions that benefit from falling rates if you share the belief in lower rates to come. Similarly, a move to reduce exposure to negatively affected sectors such as industrials and related commodities might be merited.

Keith on BNN Thursday August 29th at 6:00pm

Keith appears regularly on BNN Bloomberg MarketCall to answer viewer questions on the technical analysis of stock trends, and to provide unique insights on the factors of technical analysis used in successful investment management.

If you have questions about the technical analysis of stock trends for individual stocks, be sure to phone in with your questions for Keith during the show. Call Toll-Free 1-855-326-6266

Or email your questions ahead of time (specify they are for Keith) to [email protected]

One Comment

  • I am not sure about holding insurance companies in a low interest rate environment.
    They may make a quick capital gain on their bonds when rates drop but they need to hold them so finance their outgoing cashflow.

    I may also have other business lines but they seem to behave more like banks.


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