U.S. bond yields rose on fear the improving labor market could spark the Federal Reserve to raise interest rates sooner rather than later. As investors keep a close eye on the timing of the Fed’s rate hike, the focus remains on “the market as a whole and the other is interest rate-sensitive investments,” said Mark Luschini, the Chief Investment Strategist at Janney Montgomery Scott.
For investors, who are particularly nervous about how rising rates will affect their portfolios, Luschini advised avoiding, “those which are primarily income plays and can be affected by higher bond yields,” including the telecom, REITs, MLPs, utilities sectors.
“Fed lift-off tantrum, I think it’s likely,” said Luschini, referring to the market’s ‘taper tantrum’ that took place after then-Fed chair Bernanke’s comments in May of 2013, suggesting a scale back in asset purchases might come sooner than investors expected.
“It seems as though investors in one hand are saying ‘no, the markets already baked in the probability of a rate hike,' yet at the same time, every time there’s a little bit of good news, the markets experience some turbulence.“ So Luschini thinks “investors will react in a significant way to whatever the FOMC brings forth.”
Despite the Fed’s uncertainty, the search for yield continues and Luschini likes the iShares Home Construction ETF (ITB) - which holds primarily homebuilding stocks. “Housing is picking up and housing starts should play a role in providing the inventory to meet demand," said the investment strategist. "Homebuilder confidence is strong and surveys of potential first time home buyers suggest a pent up desire to buy. Household formation is rising and demand for permanent housing should follow."