D.E. Shaw: Stock Investors May Have More Exposure to Interest Rates Than They Think

The real estate and utility sectors would underperform the most if interest rates continue to rise.

Illustration by II

Illustration by II

There is no longer one standard stock-bond correlation for all U.S. equities. According to D.E. Shaw, it all depends on the style, sector, and individual stock itself.

Interest rate sensitivities have become more dispersed since 2012, according to the latest research from the quantitative investment manager. That means stocks that previously fell when interest rates rise are now falling further, while those that previously rose with interest rates are now gaining more than before.

According to D.E. Shaw, the indication of the research for investors is that “there isn’t just a single stock-bond correlation” anymore. Even before the current rate-hiking cycle, academics and managers, including AQR, have questioned whether the traditional 60-40 portfolio can protect investors in the coming years. With the widening gap in interest rate sensitivity, equities could “perform in unanticipated ways relative to historical portfolios for which stock-bond correlations were mostly uniform,” the D.E. Shaw paper said.

D.E. Shaw measured the stocks’ sensitivity to interest rates by what it called Treasury beta, which measures how the price of a stock moves relative to changes in the 10-year Treasury note. A positive Treasury beta indicates that the stock price has been rising as Treasury notes climb, which is a result of declining interest rates.

The firm found that the Treasury beta varies for different sectors and style factors. From 2010 to 2021, the financial and energy sectors had the lowest Treasury beta — -0.74 and -0.32, respectively. The real estate and utility sectors had the highest Treasury beta of 0.77 and 0.60, meaning they could underperform the most if rates continue to rise. But since the onset of Covid-19, technology stocks have had the highest Treasury beta of all sectors after some anti-tech funds surged last year. The firm found the value premium had the lowest Treasury beta among all factors, including size, momentum, and quality.


According to D.E. Shaw, the dispersion of Treasury beta has been widening for all sectors and style factors in the past decade. One explanation for the dispersion is the central bank’s “efforts to expand its balance sheet and manage the yield curve beyond the traditionally targeted short end of the curve,” according to the research.These policies may have prompted investors to assess equities by studying how much they resemble bond assets. Even if the monetary policy normalizes, the dispersion in Treasury beta is unlikely to fade away, according to the research. Other reasons include industry-specific developments and changes in capital structure of companies.

“Over the past decade, U.S. equities exhibited increased variation in their sensitivities to interest rate movements at each of the individual stock, sector, and style factor levels,” the research concluded. “Consequently, we believe that sector and style factor portfolios, as well as many commercial equity benchmarks, may have more active exposure to interest rates than many investors appreciate.”