Here were the winning and losing investments during the last major rate spike for markets

Published Fri, Feb 26 20217:57 AM EST

Jesse Pound @/in/jesse-pound @jesserpound

Thursday's dramatic rise in Treasury yields sent shudders through the equity market , helping to spark a widespread sell-off after stocks had been trading near record highs. Analysis of a similarly rapid rise in the 10-year yield nearly a decade ago, known as the "taper tantrum," shows a distinct group of winners and losers and could inform investors about what they may want to buy and what they want to clearly avoid if this rate upswing continues. The previous jump came over a period starting in April of 2013, when the 10-year yield went from roughly 1.6%, to above 3% in a period of about 8 months. The move came as the Fed attempted to wind down its asset purchases used to calm markets following the financial crisis.. A FactSet screen of the top performing large, non-leveraged exchange traded funds during that period could inform investors of their strategy for the current moment. Small cap stocks, which are often viewed as riskier plays, performed well during the last rate spike, with the iShares Micro Cap ETF and the iShares S & P Small-Cap 600 Growth ETF making the top-10 list. Small caps are less reliant on rates since they don't use heavy borrowing to finance their growth. Regional banks, which benefit from rising rates through wider net interest margins, and defense stocks, which are often insulated from the macro economy by their reliance on government funding, also performed well. Rising rates is just one of the reasons that Bank of America is bullish on financial stocks, strategist Savita Subramanian said in a note this week. "Not only does Financials rank #1 in our quant model, but the sector has the highest possible rank on all three components (EPS Revisions, Price Momentum and Valuation). The sector is the biggest beneficiary of rising rates," the note said. One area that many strategists have warned could be at risk today with rising rates is tech stocks, which are trading at high valuations after a strong run in recent years. However, those stocks held up well in the previous yields spike. The Invesco Nasdaq Internet ETF rose nearly 48% during that period. To be sure, there are differences in valuation levels and the underlying economy in 2021 than in 2013. The strong performance of tech stocks over the past decade and small cap stocks in the final months of 2021 may be a reason that they won't repeat their performance during the taper tantrum. Still the history could indicate the aggressive selling in tech this week may be a bit overdone. What investors may want to avoid Some of the stocks that suffered the most during the last spike in rates were real estate and utility plays. Both utilities and real estate investment trusts are popular stocks for income investors, and rising bond yields makes holding the stocks less attractive relative to buying bonds instead. The real estate sector can also be hurt by rising rates, which could depress demand for housing and commercial buildings as individuals and businesses shy away from locking in long-term debt at high rates. Subramanian warned clients that dividend payer stocks that compete with bonds could be some of the worst performers in the current environment. "Our underweights are dominated by long duration (hyper-growth) and short duration (bond-proxy) sectors that are hurt by rising rates," the note said.

Traders work on the floor of the New York Stock Exchange.

NYSE

Thursday's dramatic rise in Treasury yields sent shudders through the equity market, helping to spark a widespread sell-off after stocks had been trading near record highs.

Analysis of a similarly rapid rise in the 10-year yield nearly a decade ago, known as the "taper tantrum," shows a distinct group of winners and losers and could inform investors about what they may want to buy and what they want to clearly avoid if this rate upswing continues.