How to Play the Interest-Rate Game

NEW YORK ( Real Money) -- If nothing else, it certainly is an interesting time in the market. Government bonds in Europe and the U.S. have been selling off recently, with 10-year Treasuries at their high yield so far in 2015. Oil continues to rally, confounding a myriad of pundits who were predicting $30 or even $20 a barrel just a month or so ago. Copper and iron have also rallied recently, as the huge rise of the U.S. dollar since summer has started to ebb.

Additional volatility was brought upon equities as the chair of the Federal Reserve said Wednesday that equity valuations were "quite high." Even though first-quarter GDP was dismal and likely to be revised lower after Tuesday's disappointing trade data, the vast majority of the market believes economic growth will rebound starting in the second quarter and that the Federal Reserve will hike interest rates for the first time since 2006 by the end of summer.

Maybe the efforts of the world's central banks are starting to bear fruit against deflation, and we are in the early stages of a controlled rise in interest rates. If this is the case, investors will want to increase exposure to the financial sector as a rise in rates will help banks' net interest margins, improve returns for insurers on their investment portfolios and generally buoy investors' sentiment on the financial sector overall.

Despite some snafus in recent years, JPMorgan Chase (JPM) is one of the best-run major banks. The stock is also cheap in what feels like an overbought market at roughly 11x this year's profits and the shares yield nearly 3%. The bank should also benefit from a healthier economy in the second half of the year, a strong job market and anticipation of a change in the administration in 2016, which should lower the regulatory burden for this sector.

Also, thanks to a couple of bank acquisitions, credit card issuer Capital One (COF) is no longer dependent on short-term funding, as it was before the financial crisis. A stronger economy should lead to stronger loan growth in the second half of 2015. The stock goes for 11x trailing earnings and yields 1.5%.

If this is another of several "false starts" in the long-anticipated rise in interest rates, some of the real estate investment trusts are starting to look interesting again after a recent decline on the back of rising rates. At the top of the list is longtime favorite Chatham Lodging Trust (CLDT), which is down more than 10% from its first-quarter highs. The lodging REIT posted solid quarterly numbers this week, slightly beating analysts' revenue and earnings consensus. Revenue rose almost 60% year over year as the company is benefiting from a strategic acquisition in 2014. The shares are not expensive at less than 12x this year's expected funds from operations, and it yields 4% via monthly dividend payouts.

Where interest rates go from here is one of several $64,000 questions for the market. 

Editor's Note: This article was originally published at 9 a.m. EST on Real Money on May 7, 2015.

This article is commentary by an independent contributor. At the time of publication, the author held is long in CLDT, COF and JPM.

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