3 Interest Rate Sensitive Stocks to Buy Before Rates Fall Off a Cliff

Investors looking to put capital to work in this difficult-to-predict market certainly have plenty to consider right now. Whether we’re talking about monetary policy (what the Federal Reserve will do with interest rates) fiscal or trade policy (largely set by congress and the White House) or other geopolitical concerns stemming from domestic or international shifts, there’s a lot going on right now for investors to digest.

<!– Legacy Bulma: `live-update-content` opening

That said, for much of the past two years, a pivot toward more dovish monetary policy in the form of lower long-run rates is something many investors have been banking on as a central pillar to the thesis that multiples could expand and valuations could head higher for most companies.

The idea that many of the future rate cuts the market is expecting have been priced into valuations is one that can keep some investors up at night. However, I’d argue that aside from the more speculative (and largely unprofitable) tech companies that may have benefited from multiple expansion in anticipation of these cuts, I think there could be another group of winners from interest rate cuts down the line.

I do think we’ll see more cuts over the course of the next few years, but I don’t think the returns for investors will be normally distributed. Here are the three interest rate sensitive stocks I think could be worth buying ahead of a sharp drop off in interest rates. 

Comerica (CMA)

One of the more interest rate sensitive lenders in the market, Comerica (NYSE:CMA) is a regional bank with a balance sheet that does appear to have some of the highest leverage to interest rate cuts of any of its peers. 

The bank’s high non interest bearing deposit portfolio and swaps and securities with yields in the 2.5% range could benefit disproportionately from interest rate cuts. As credit demand increases alongside interest rate cuts (the typical scenario), this could boost loan volume as well, driving greater profitability and balance sheet strength for investors. 

While Comerica may not necessarily earn as much on future Treasury or fixed income holdings in a declining interest rate environment, these headwinds would be more than offset by a boost in commercial lending among the company’s existing clientele. 

I think lower interest rates boosting credit demand is one of the more compelling storylines to watch, and Comerica is one bank I think is uniquely positioned to benefit from such an environment right now. 

Boston Properties (BXP)

Perhaps the most interest rate sensitive sector of them all is real estate. In the world of real estate investment trusts (REITs) that have the most to gain from an interest rate cut would be Boston Properties (NYSE:BXP), I’d argue. 

An office-focused REIT, Boston Properties has seen its stock price decline by roughly 7% over the past five years. Indeed, over a time frame in which most major indices at least doubled over this period of time, this return is what most investors would call abysmal.

However, with return to office mandates now in place, and a number of top office REITs coming back into favor among investors, I do think BXP could be due for some nice momentum if interest rate cuts pick up from here. The company’s floating rate debt would benefit most from such rate cuts, as would its net operating income and other key metrics as tenants have more wiggle room on their own personal balance sheets. Fewer delinquencies or vacancies is a good thing, and given this stock’s medium-term decline, I think BXP could actually be the most intriguing pick on this list for investors looking for interest rate sensitive winners moving forward. 

Royal Caribbean (RCL)

This last pick on my list is perhaps a bit more speculative than the others. That’s because while Royal Caribbean (NYSE:RCL) is a heavily indebted cruise operator (largely thanks to the pandemic and years long shutdowns in most major global markets), it’s also true that if interest rates fall off a cliff, that could be because of a recession.

Indeed, that’s the other piece of the puzzle investors need to try to solve for. Will these cuts be the so-called “insurance cuts” Fed chair Jerome Powell has talked about in recent meetings? Or will these cuts need to take place to inject liquidity into the market and support an economy that’s on thin ice?

We’ll have to see of course. But few would debate that the best likely outcome for Royal Caribbean would be one in which interest rates come down toward the natural rate because that’s where they should be. Lower rates would mean greater free cash flow, as the company would be able to refinance its existing debt much more cheaply and potentially add to the liabilities side of its balance sheet if needed as a balance sheet buffer. 

The image featured for this article is © Emir Hoyman / iStock via Getty Images