Funds: How to capitalise on rising interest rates

Despite poor fourth-quarter GDP figures, the markets believe a rise in interest rates is only a matter of time. Paul Amery looks at two exchange-traded funds which allow investors to gain if rates rise.

The big question for British investors in 2011 seems to be: "When are interest rates going to rise?" December's leap in UK consumer price inflation to 3.7% has made it much tougher for the Bank of England to justify keeping the interest rate at 0.5%. The poor fourth-quarter GDP figure has muddied the waters. But markets now believe a rise is only a matter of time.

According to the short-sterling futures market, the wholesale UK interest rate (Libor, which has recently traded at a slight premium to the bank or base rate) is set to rise from 0.77% to 1.4% by the end of this year, 2.4% by the end of 2012 and 3.3% by the end of 2013. Further into the future, rates are seen plateauing at around 4%. So steady, if unspectacular, rate rises are already priced in. If you expect rates to rise further or more rapidly than this, shorting bonds may be a good bet.

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Paul Amery

Paul is a multi-award-winning journalist, currently an editor at New Money Review. He has contributed an array of money titles such as MoneyWeek, Financial Times, Financial News, The Times, Investment and Thomson Reuters. Paul is certified in investment management by CFA UK and he can speak more than five languages including English, French, Russian and Ukrainian. On MoneyWeek, Paul writes about funds such as ETFs and the stock market.