Rates have broken out. 

Yesterday, the yield on the US 10-Year Treasury jumped to 4.63%.

We still have a couple more days left before the week closes, but the 10-Year is on pace for its highest weekly close since January 2025. 

At the same time, the yield on the US 10-Year Treasury is on track for its highest weekly close since 2007. 

Higher rates aren’t always an automatic death sentence for stocks. After all, rates have been on the rise since early March. And the stock market has performed well during this period. 

But here’s the thing about breakouts: They often accelerate trends. 

In other words, rates could start rising faster from here. That could put pressure on many stocks, particularly rate-sensitive groups like homebuilders.

But it’s not all bad news. You see, there’s one sector that can perform great in this sort of environment: energy.

Remember what happened after COVID… 

Inflation surged. This occurred because that pandemic-induced shutdown led to global shortages for many goods. At the same time, the Federal Reserve pumped trillions of dollars into the global financial system to prevent a complete collapse. 

The result was a massive spike in inflation. At its peak, the US Consumer Price Index hit 9.1% in the summer of 2022. The Fed had to step in with rate hikes to eventually fix the problem.

Most stocks crumbled during this rising rate environment. But not energy. 

The group finished 55% higher in 2021 and 66% higher in 2022. It was the top-performing sector both years.

Now, I’m not saying that the same thing is about to happen. We don’t have runaway inflation today. But inflation is sticky, and that’s a big reason why rates have been edging higher. 

Energy stocks have responded to this. Once again, they’re the year’s best-performing group, up 30% year-to-date. And they look like they’re heading even higher. 

This chart shows the performance of the Energy Select Sector SPDR Fund (XLE), which invests in a basket of energy stocks. XLE has been on a tear over the past few weeks and appears to be on the verge of breaking out of a big bull flag. 

The SPDR Oil & Gas Exploration & Production ETF (XOP) has been even stronger. It’s already broken a multi-month downtrend. 

And then we have the refiners, which have been the strongest corner of the energy complex. 

The VanEck Oil Refiners ETF (CRAK) has surged 25% over the past month, hitting new all-time highs day after day. 

Again, energy stocks are one of the only major sectors that can work when interest rates are on the rise. And I believe there’s a good chance that rates head higher in the coming months.

You’ll want energy exposure.

Justin Spittler Director of Trading, RiskHedge