This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
TheStreet Open House

Global Macro: Rising Rates Hurt REITs, Emerging Markets

Stocks in this article: IEF VNQ CEW

NEW YORK ( TheStreet) - Ten-year Treasury yields broke out to the upside this week, which has major implications for asset classes across the globe, especially for real estate investment trusts and assets in emerging markets.

Rising yields diminish the value of current outstanding debt. As benchmark yields rise, assets that track the risk-free rate are inflated and their underlying price falls in nominal value.

The chart below is an index tracking the 10-year Treasury rate. The price action formed an ascending triangle pattern with strong overhead resistance. As uncertainty lingered over the future of U.S. monetary policy, the price traded in an increasingly tighter range.

An exchange-traded fund that closely tracks the price movements of the 10-year Treasury is iShares Barclays 7-10 Year Treasury (IEF).

For now, it looks like investors have begun to price in an end to the bond-buying phase of monetary stimulus, which should begin this September at the Federal Reserve's meeting.

Investors have sold off fixed-income assets and reallocated their funds toward commodities and foreign equity markets, such as Europe.

The next chart is of Vanguard REIT Index ETF (VNX). REITs depend on interest rates for determining financing costs. As mortgage rates rise, it becomes more expensive to acquire property.

The chart below shows a steep decline in the REIT ETF beginning in mid-May. As Federal Reserve Chairman Ben Bernanke hinted at a potential end to quantitative easing, investors realized it would mean an end to the cheap credit over the preceding years.

The ETF saw a strong selloff and now stands at yearly lows. Policy expectations are solidly priced in at this point, and so look for further weakness -- though somewhat subdued compared with past movements -- to continue leading up to the September Fed meeting.

The last chart is of WisdomTree Emerging Currency (CEW). Although the U.S. dollar has been under extreme selling pressure the past few months, rising rates have caused many investors to flee assets in emerging markets.

Emerging markets tend to incur large debt loads. Rising rates cause borrowing to become more expensive to these countries. With gross domestic products remaining suppressed worldwide, increasing debt expenses expand the debt/GDP ratio. That causes already risky countries to become riskier and pushes investors out of such assets.

As uncertainty continues in August and benchmark rates remain at elevated levels, funds should flow into developed economies with more stable monetary policy such as European equities and currency.

At the time of publication the author had no position in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

Andrew Sachais' focus is on analyzing markets with global macro-based strategies. Sachais is a chief investment strategist and portfolio manager at the start-up fund, Satch Kapital Investments. The fund uses ETF's traded on the U.S. stock market to gain exposure to both domestic and foreign assets. His strategy takes into consideration global equity, commodity, currency and debt markets. Sachais is a graduate of Georgetown University, where he earned a degree in Economics.

Check Out Our Best Services for Investors

Action Alerts PLUS

Jim Cramer and Stephanie Link reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

Jim Cramer's protégé, David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
Try it NOW
Try it NOW
Try it NOW

Check Out Our Best Services for Investors

Dividend Stock Advisor

Jim Cramer's protégé, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
Try it NOW
Try it NOW
Try it NOW
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!

Markets

DOW 17,407.50 +20.29 0.12%
S&P 500 2,032.36 +2.81 0.14%
NASDAQ 4,707.50 +26.0030 0.56%

Partners Compare Online Brokers

Free Reports

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs