Coming into 2026, all the chatter was about cutting short term rates (which the Fed does directly by fiat). Long term rates, which are generally set by the broader financial markets, were more or less steady, despite the angst over ongoing gigantic federal deficits; the world remained ready to absorb T-bonds, since they are regarded as the most liquid and secure yield-bearing instruments for global finance.
The Iran war has changed all that. The administration, like other administrations in other conflicts over the past half-century, apparently underestimated the adversary’s resilience in the face of bombing. Without further comment on the geopolitics, it suffices for our purpose as investors to assume that there is a good chance that the conflict will continue for some time, and thus oil prices will remain elevated. This works through the system as persistent inflation, even if the immediate effects of consumer gasoline prices are stripped out of the inflation measure. Bond buyers naturally must take into account expected inflation in pricing what rates they are willing to pay for. Also, the unprecedented boom in data center construction is competing for investment dollars. And so, the ten-year T-bond yield has surged from 4% in late February to over 5% now.
As everyone knows, the price of existing long-term fixed debt (e.g., T-bond, corporate bond, etc.) goes down as rate go up, since the existing bond now has to compete in the market with new, higher yielding bonds. Thus, bondholders are crying in their soup, as the price of IEF (ETF that holds 7–10-year T-bonds) has dropped 7% year to date, and the longer-termed (20+ year) TLT is down 10%. Those are big hits to what are thought to be safe, secure holdings.
What can investors do to protect themselves against further rate increases? One approach is simply to avoid holding long-term bonds or bond equivalents (fixed-rate debt). You can hold very short term (e.g. 3-month) T-bills, as in the TBIL fund. Or you can hold instruments with floating rather than fixed rate. For instance, FLOT holds floating-rate government debt, PAAA is a complex but AAA-rated ETF, and many preferred stocks (e.g., NLY-F) also pay some fixed increment above the current market short-term rate. The values of these instruments are relatively insensitive to overall interest rates.
For a more direct hedge, that goes up when long-term bonds values go down (i.e., when rates go up), there are several funds that use derivatives that essentially short T-bond values. TBT is a straightforward, plain vanilla -2X short of the 20+ year T-bond index. With TLT down 10%, TBT is (unsurprisingly) up a full 21% YTD (total return). PFIX is an actively-managed fund that does something similar, but with wilder swings. It is up a sizzling 30% in 2026, but it was down by 12% in late June. Most advisors seem to recommend TBT or PFIX for tactical trading only, to hold only when you have conviction that rates are going up soon. If the Fed come out swinging tomorrow with a QE bazooka to drive down rates, these stocks will likely crater.
RISR takes a middle ground, it holds interest-only strips of mortgage-backed securities, so it brings in a decent current yield (5.8% now), and its value rises somewhat as rates go up. Its total return YTD is 6.2% – – maybe not something to brag about at a cocktail party, but it beats CDs.
Here is a 3-year chart of some of these stocks (total return):
Another strategy is to buy individual bonds and hold them to maturity, so you know exactly what the final payout will be.
Saving the best for last: it turns out that if you are a homeowner with a fixed-rate mortgage, you are effective “short” long-term debt, so you “own” a primo hedge against rate increases. Congratulations!
Disclaimer: Nothing here should be considered advice to buy or sell any security.
