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6 Winners From Higher Rates

Dan Caplinger
November 24, 2010

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