How to Position Equities for Rising Rates

Simeon Hyman, CFA, joined ProShares in 2013 as Global Investment Strategist, and head of the investment strategy group. He leads ProShares’ team of investment professionals engaged in portfolio analysis, product research and development, education and the delivery of investment strategies using the company’s ETFs. Hyman earned bachelor’s and master’s degrees in economics from the University of Connecticut, and an MBA from Columbia Business School. He holds Series 7, 24, 63 and 66 FINRA designations.

I spoke with Simeon on March 24.

The conventional wisdom is that the U.S. is heading for a rising-rate environment. Is that your view?

For sure, it is. The interesting situation that we're seeing is not just one of inflation, not just one of potential rate hikes from the Fed, but very critically the unwinding of quantitative easing and, in fact, quantitative tightening, The Fed is removing the artificial suppression of longer-term yields. That's why we expect to see rising rates across the yield curve, not just the short or long end. We expect continued rising rates across the entire yield curve as we remove the artificial constraints around the bond market.

Let's start with the short end of the curve. Most people expect multiple rate hikes from the Fed this year. What's your forecast?

We typically don't forecast rate hikes at ProShares. We certainly are in the camp of seeing several more hikes, but we don't know if the number is four, five or six. I continue to harp on quantitative tightening. That was the most important thing we heard from Chair Powell over the last several comments that he has made formally to Congress and in other business meetings he's had. It is that shrinking of the balance sheet that will continue to drive rates higher, even as inflation comes down.

Let's just assume that the hikes do their job and inflation comes down. Remember we still have negative real yields just about everywhere. This is not what we experienced in the early 1980s when the Fed funds rate went to the moon, ultimately bringing down longer term rates. Not this time around – it will be normalization of long-term rates in conjunction with rate hikes on the short side.