Fed Clues Could Keep Propelling Insurance ETFs

Federal Reserve Chairman Ben Bernanke’s reiteration that interest rates will remain low for quite a while and traders’ interpretations that the Fed will not commence tapering of its quantitative easing program as soon as previously expected helped boost stocks Thursday. In the process, yields on 10-year Treasurys dropped 10 basis points to 2.6% from 2.7%.

Ebullience over the notion that rising interest rates are not a near-term concern sent many sector ETFs higher, but some rising-rate plays, such as regional bank funds, closed lower. The iShares U.S. Regional Banks ETF (NYSEArca: IAT), as just one example, lost nearly 1% on above average volume. [Regional Bank ETF Turns Laggard]

However, insurance ETFs were able to close the day in the green. The SPDR S&P Insurance ETF (NYSEArca: KIE) and the First Trust Financials AlphaDEX Fund (NYSEArca: FXO) each gained almost 1% and both touched new 52-week highs. Odd considering KIE and FXO, a diversified sector ETF with heavy insurance industry exposure, have been highlighted as prime beneficiaries of a rising rate environment. [This Financial Services ETF has it All]

Perhaps the scenario is not odd upon delving into some Fed clues. While Bernanke was careful to distinguish between tapering and rate tightening, it cannot be forgotten that tapering fears have contributed to rising 10-year yields. Yes, those yields declined Thursday, but 2.6% is still well above the 2.13% seen on June 3.

As J.P. Morgan’s Michael Feroli said in a note republished on ZeroHedge, “unlike tapering, tightening will likely be a choice for Bernanke’s successor, so what he says about the conditions for tightening are only indicative of the thinking that may prevail at that time.” One way of interpreting that is the Fed probably will not raise rates while Bernanke is chairman.

The potentially good news for insurance ETFs, and perhaps this is already being priced into the KIE and FXO, is that President Obama has already signaled that he will allow Bernanke to retire when his term ends next January. Assuming that happens and Bernanke’s successor is selected from the current pool of Fed governors, it is not far flung that someone with more hawkish views could be chosen to be the next central bank chief. As a Thomson Reuters graph shows, five of the current Fed governors earn fours or fives on a scale of one to five with five being most hawkish.