The sectors most vulnerable to rising rates

Treasury yields are starting to climb, with the 10-year yield at about the highest levels in four months. This after a strong October jobs report stoked speculation that the Federal Reserve is set to raise the benchmark federal funds rate in December. And if Treasury yields keep rising, a few sectors could be in big trouble.

Erin Gibbs of S&P Investment Advisory Services is watching industrial and materials stocks, which she said have the highest correlation to changing interest rates. As the U.S. dollar and rates both rise, that will put pressure on many of these names, she said.

But between the two, Gibbs said the materials sector stands to suffer the most.

“Obviously these are both heavily tied to the dollar story,” Gibbs said Tuesday on CNBC’s “Power Lunch.” “But I think the most vulnerable fundamentally is really the materials sector.”

Earnings for the materials sector are expected to contract 5 percent over the next 12 months, Gibbs said. Meanwhile, she said the category is trading at a rich valuation compared to others at 7.5 times projected earnings.

Another space that could be in trouble is oil exploration, according to Boris Schlossberg of BK Asset Management. Although XOP, the oil and gas exploration ETF, has rallied this quarter by more than 16 percent, Schlossberg warns investors to stay away.

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“They’re going to get squeezed both from the fact that oil stays low … and that rates go up and they’re all very overleveraged,” Schlossberg said Tuesday, referring to the debt on those companies’ balance sheets. “Any rally in XOP is pretty much an opportunity to sell.”

Despite a recent bounce, the XOP ETF has still plunged nearly 40 percent over the past year.

“When speculating, I think it’s best to kick the guy when he is down,” Schlossberg quipped.

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