How to benefit from increasing long-term interest rates?

By now I'm sure it has become very clear to you that the long-term interest rates are increasing. This is the trend which will last for long long time! The long term interest rates are determined by the long-term Treasury yields. As we have discussed many times here, the Treasury yields have been relentlessly increasing in the past several weeks. This is just the beginning of a very long trend and we are entering into the high interest rate era. While the long-term interest rates are heading much higher, the short-term interest rate is still near zero, which is not likely increase any time soon as promised by Bernanke. In other words, the spread (or the difference) between the long-term and short-term interest rates are becoming bigger. So who will benefit most from this widening spread? The bank industry. Basically it means that the bank can borrow cheap money but lend out expensively for higher interests and therefore can pocket more money by doing so.

With this understanding, it can be easily understood that the bank industry is at the sweet spot at the moment and you man notice that bank stocks are overall moving high these days. This bull trend will continue. One specific bank sector that I think will benefit more is the regional banks. Unlike the big banks which rely more on trading and other business income, regional banks are more involved in loans serving for local communities. Therefore they are better positioned to reap stronger profits from these long-term rate hikes with widening interest spread.

KRU is a leveraged ETF for regional banks. As you can see it is in a well defined uptrend. You may notice that it has jumped almost straight up in the past 2-3 weeks, in tandem with the sharp increase of the long-term interest rates during this period. While short-term volatility is inevitable, the long-term uptrend will continue with this sector as long as the mega-trend is not changed: higher long-term rates. I firmly believe it will continue for years to come!