6 Winners From Higher Rates

The long-awaited moment of truth for the bond market may finally be here. As rates start to move up, those who've fled to the perceived security of bonds may soon find out that the bond market isn't as safe as they thought it was.

But that doesn't mean you have to sit and watch as your bond investments start to lose value. Instead, look beyond the bond market in search of other investments that could actually benefit from higher rates.

The end of the bond bull?
It's premature to declare an end to the decades-long bull market in bonds. Ever since interest rates hit their highs in the inflation-plagued days of the late 1970s and early 1980s, bonds have slowly but steadily seen their yields fall over time, culminating in the record low yields we've seen over the past couple of years.

By comparison, the hiccups in the bond market in recent months are just a drop in the bucket. Even the greater than 10% drop we've seen in the iShares Barclays 20+ Treasury ETF (NYSE: TLT  ) only returns the fund to levels it saw in June.

But they may be just a taste of further disruptions to come. Yesterday, the Federal Reserve revealed that there was broad disagreement and debate about whether it should use a second round of quantitative easing to attempt to bolster the economy. Given that QE2 formed the basis of what may prove to have been the blowout top in bonds, signs of disunity among policymakers could persuade bond investors that they can't count on the Fed to keep its resolve in the future.

So if bonds aren't a good place to put your money, what's the better move? Let's take a look at a couple groups of companies that are well-positioned to benefit from higher rates.

Cash: worth something again?
Lots of companies are keeping huge amounts of cash on their balance sheets. Recent estimates put the total figure at close to $1 trillion within corporate coffers. During the low interest rate environment, that dormant cash has returned next to nothing for them, drawing criticism from some investors.

In particular, Apple (Nasdaq: AAPL  ) has gotten numerous calls from shareholders demanding a dividend in light of the iEmpire's $25 billion in cash and short-term investments. And even though fellow cash hoarders Oracle (Nasdaq: ORCL  ) and Cisco Systems (Nasdaq: CSCO  ) have either started paying or have announced plans to begin dividend distributions, it's clear that cash management will play an important role for companies throughout the industry.

Higher rates would give those companies a meaningful boost to earnings. Even a single percentage point rise in cash returns would add hundreds of millions of dollars to their bottom lines.

Rewarding the opportunists
On a related note, a number of companies have already taken advantage of the low interest rate environment to tap the credit markets for capital. Johnson & Johnson (NYSE: JNJ  ) , IBM (NYSE: IBM  ) , and Wal-Mart (NYSE: WMT  ) were among the companies that cashed in on the best borrowing opportunity ever in recent months, enjoying rates that in some cases came in below 1%.

Nothing would reward those companies more than seeing rates rise now. Higher rates would give their capital greater value, essentially giving them an arbitrage opportunity to earn instant profits without taking any risk at all. More importantly, it would give them a competitive advantage against rivals who didn't take the opportunity to raise capital, giving them cheaper ways to finance smart business expansions or strategic acquisitions that could create profits for years to come.

Go with the flow
Long-term trends don't die without a fight, and it's way too soon to declare an official end to one of the longest bond bull markets in history. But the current turmoil definitely raises the possibility that we've seen the beginning of the end for bonds. If you don't want to be the last one standing without a chair to sit in, you'd do well to start looking at ways to make money even if bond rates continue their recent rise.

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Fool contributor Dan Caplinger expects to win from higher rates. He owns shares of Apple. Wal-Mart is a Motley Fool Inside Value pick and a Motley Fool Global Gains pick. Apple is a Motley Fool Stock Advisor recommendation. The Fool has a bull call spread position on Cisco Systems. Motley Fool Options has recommended a diagonal call position on Johnson & Johnson, which is a Motley Fool Income Investor selection. The Fool owns shares of Apple, IBM, Johnson & Johnson, Oracle, and Wal-Mart. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy makes you a winner.


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  • Report this Comment On November 24, 2010, at 5:56 PM, DDHv wrote:

    The book, "CDx3" describes a strategy that is almost as safe as a CD, but pays off better. In addition, they can be cashed in at any time, with the only penalty coming from a possible lower price at the time of cashing in. This is not commonly available - four in the past year, but they make a good cash stash!!!

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