What are the best U.S. investments in an environment of rising long-term interest rates?

The best defensive investment starts with the date you need the money

“Rising rates” is an incomplete investment premise. Long yields can rise while short rates hold steady or fall. Treasury bills have little price sensitivity and mature quickly; their next reinvestment yield depends on the short end. Treasury floating-rate notes reset against the latest 13-week bill auction rate, so they offer similarly limited duration exposure with income tied to short rates. [2][4]

For readily available reserves, we favor a direct bill ladder or SGOV. Treasury FRNs, held directly or through TFLO or USFR, are close alternatives. The distinction becomes more consequential when the investor has a fixed payment date: an individual Treasury maturing near that date can lock in the relevant cash flow and reduce repeated reinvestment decisions. A rolling bond ETF continually replaces its holdings, leaving the investor with an ongoing market-price exposure. [2][5][6][4][7]

The investment’s holding period and purpose determine which risk is worth taking.

Sources: TreasuryDirect and fund disclosures; equity and sector preferences reflect our assessment of the evidence. [4][2][5][6][8][7][9][10]

That ranking leaves room for short fixed-rate notes. If only longer yields rise, a short-note fund can retain its extra income without suffering much immediate repricing. Our bill preference rests on capital stability and flexibility; investors able to hold a specific note to a known spending date have a different optimization problem.

It also leaves room for equities. A forecast about bond yields alone is too narrow a foundation for moving a long-term portfolio entirely into cash. The harder question is how much extra return investors receive for accepting rate sensitivity.

Long bonds offer little extra income for a large increase in price sensitivity

A bond’s price adjusts when investors demand a higher return on its remaining payments. The longer the wait for those payments, the larger the adjustment generally becomes. Duration puts that sensitivity into a usable number: TLT’s reported duration of 14.84 years implies approximately 14.8% initial price pressure from a one-percentage-point increase in its relevant yields, before convexity. [1]

The income advantage is much smaller. On September 24, SGOV’s SEC yield was 3.67%, IEF’s was 4.84% and TLT’s was 5.41%. Moving from bills to long Treasuries therefore added only 1.74 percentage points of annualized net income, while duration rose from approximately 0.10 year to 14.84 years. [2][11][1]

The increase in price sensitivity is much larger than the increase in annualized income.

Sources: iShares. SEC yields dated September 24, 2026; durations dated September 24–25. SEC yields incorporate fund expenses. [2][6][11][1]

Divide TLT’s 1.74-point income advantage by its 14.84-year duration and the bill-relative cushion is approximately 12 basis points. The comparable IEF threshold is about 17 basis points. Using estimated prospective bill carry of 3.9–4.15%, informed by SGOV’s portfolio yield and the short Treasury curve, reduces TLT’s cushion to roughly 8–10 basis points. [2][11][1][3]

A larger move makes the consequence easier to see. With short-rate income unchanged, a further 50-basis-point increase in the yields relevant to TLT produces a first-order one-year return estimate of about −2.0%, versus 3.7% for SGOV. At a 100-basis-point increase, the TLT estimate falls to approximately −9.4%. [2][1]

Our conclusion is to keep long-duration funds out of the near-term capital-preservation allocation. Their higher yields can be valuable for long liabilities and recession protection, but those uses depend on a different holding period and a willingness to absorb interim losses.

That establishes the defensive choice. The growth allocation requires another step: identifying why yields are rising.

The cause of the selloff determines which equities can win

Higher yields can accompany stronger growth, an inflation shock, or greater compensation for holding long bonds. Stronger growth can lift corporate earnings enough to offset a higher discount rate. Inflation can benefit commodity producers while squeezing customers. A rise in term premiums without better earnings offers much less support to equities. Our sector preferences change with those mechanisms.

The historical record makes the distinction concrete. During the July–December 2016 reflation window, ten-year Treasury yields rose 108 basis points and the bank ETF KBE gained 44.6%. During the January–October 2022 inflation-and-tightening window, yields rose 262 basis points and KBE lost 14.7%. Energy shares led the second episode while broad equities and long Treasuries fell. [12][13][14][15][16][10][17]

Banks prospered in the 2016 window and fell in 2022; energy exposure produced a different outcome.

Sources: Total Real Returns. Cumulative nominal total returns with distributions reinvested, July 8–December 30, 2016 and January 3–October 24, 2022. The selected windows have different lengths. [18][17][16][10]

The current curve also argues against a simple label. From January 2 to September 25, 2026, the ten-year nominal yield rose 98 basis points, from 4.19% to 5.17%. Over the same dates, the ten-year real yield rose 89 basis points, leaving a nine-basis-point increase in the nominal-minus-real spread. The two-year yield rose 134 basis points. The increase extended well beyond the long end. [19][20][21][22]

That decomposition locates most of the nominal increase in real yields. Separating stronger growth, expected monetary policy and real term premiums requires further evidence; the yield arithmetic alone cannot settle their contributions. We would resist assigning the entire move to fiscal anxiety or inflation.

Our conditional ranking follows. With stronger growth and stable credit, retain broad equities and consider profitable cyclical businesses selectively. With persistent inflation or a commodity-supply shock, short TIPS and limited energy exposure become more useful. With higher term premiums and little improvement in earnings, bills remain the clearest defensive choice, while lower financing needs become more valuable within equities.

Bank disclosures weaken the simple “higher rates, higher profits” trade

Banks receive interest from borrowers and securities, then pay depositors and wholesale lenders. Higher asset yields help only to the extent that funding costs, credit losses and other offsets leave shareholders with more income. Bank of America’s second-quarter figures show the scale of that subtraction: $33.8 billion of gross interest income less $17.8 billion of interest expense produced approximately $16.0 billion of net interest income. [23]

The shape of the rate move matters sharply. BAC modeled just $200 million of additional next-twelve-month banking-book NII from a 100-basis-point increase confined to long rates. Its modeled benefit from a parallel increase was $1 billion. JPMorgan’s long-end sensitivity was larger, at $1.1 billion, although its earnings-at-risk measure also includes certain rate-sensitive fees. [24][23]

A rise confined to long rates produces a smaller modeled income benefit at both banks.

Sources: June 30, 2026 filings. Pretax sensitivities cover the following twelve months relative to each bank’s baseline and assumptions. [24][23]

For BAC, the long-end benefit amounts to only about 0.31% of annualized second-quarter NII, calculated by dividing $200 million by four times the quarter’s $16.0 billion. A 100-basis-point decline in short rates with the long end unchanged produced a modeled $1.8 billion reduction in NII. “A steeper curve” therefore leaves a great deal of the investment question unanswered. [23]

Existing assets create another offset. BAC’s held-to-maturity securities had amortized cost of $505.8 billion and fair value of $423.7 billion at June 30: an economic valuation gap of approximately $82.1 billion. That gap sits alongside the prospective income benefit and illustrates the balance-sheet cost of having committed capital at earlier yields. [23]

We are skeptical of buying banks simply because long rates are rising. A stronger case would combine stable deposits, growing loan demand, benign credit losses and improving disclosed rate sensitivities. Banks belong on a conditional growth-and-credit watchlist.

Insurers offer a credible reinvestment channel, provided underwriting holds

Insurers collect premiums before paying claims and invest the funds in between. Higher yields gradually improve the return on money being reinvested, while underwriting determines whether the underlying insurance business creates or consumes value. This combination is why disciplined property-and-casualty insurers are our preferred equity business model to investigate in a sustained higher-yield environment.

Chubb illustrates the combination. In the second quarter, net premiums written grew 3.6% to $14.7 billion, its P&C combined ratio was 83.8%, and pretax investment income rose 12.3% to $1.76 billion. A combined ratio below 100% indicates an underwriting profit before investment returns. Premiums written measure business booked during the period. [9]

Chief executive Evan Greenberg attributed the quarter’s result to “Strong P&C underwriting, investment and life income.” The ordering matters: investment income works alongside the insurance franchise. Chubb is an illustrative U.S.-listed candidate for this approach; our preference remains conditional on valuation and underwriting discipline. [9]

The reinvestment benefit arrives in installments. Chubb reported $175.4 billion of invested assets, but only $4.24 billion in the identifiable fixed-maturity bucket due within a year. If that bucket were reinvested at yields one percentage point above the counterfactual, incremental first-year pretax income would be approximately $21–42 million: the lower end assumes maturities arrive evenly through the year, and the upper end assumes immediate reinvestment. Other portfolio flows and liability effects sit outside that calculation. [9][25]

Underwriting can move much faster. Progressive’s August combined ratio deteriorated from 83.1% a year earlier to 89.3%. Applying that 6.2-point difference to August 2026 earned premiums of $7.35 billion gives approximately $456 million less monthly underwriting margin than an unchanged-ratio counterfactual. Even a profitable insurer can experience operating swings large enough to dominate incremental reinvestment income. [26]

Berkshire offers a different attraction: financial flexibility. Its Insurance and Other businesses held $324.9 billion of Treasury bills at June 30. Holding that balance constant, a sustained one-percentage-point change in reinvestment yields corresponds mechanically to roughly $3.25 billion of annual pretax income. The relevant driver is short rates; quarterly insurance investment income fell 7.9% year over year despite the large bill balance. [27]

Our preference is for sound underwriting and financial strength with reinvestment upside. We would require a share price consistent with sustainable earnings before turning that business-model preference into an individual-stock purchase.

Inflation hedges and floating coupons solve narrower problems

TIPS address purchasing power through inflation-linked principal. Their market prices still respond to real yields, making maturity central to the choice. The September 25 five-year nominal Treasury yield of 4.98% and real yield of 2.64% imply an approximate 2.34% annual inflation hurdle for matched five-year securities, subject to pricing, indexing, liquidity and tax differences. [3][28][29]

We favor short TIPS when purchasing-power protection is the objective. VTIP’s reported duration of 2.3 years implies roughly 2.3% initial price pressure from a one-percentage-point real-yield increase, before real income and inflation accrual. The longer-duration TIP ETF lost 12.9% in the selected 2022 tightening window. Inflation protection works best when the investor also chooses an appropriate holding period. [8][17]

Floating coupons address rate duration but leave credit exposure intact. SRLN’s September 24 SEC yield was 6.59%, with leveraged-loan borrower and liquidity risk attached. Corporate floating-rate funds such as FLOT likewise retain credit exposure. We would use short investment-grade credit selectively as a satellite; a higher quoted yield alone does not justify replacing Treasury reserves. [30][31][32]

Energy is a conditional inflation allocation. Exxon’s second-quarter operating cash flow of $23.6 billion less cash capital expenditures of $6.79 billion left approximately $16.8 billion. The relevant forces are realized commodity prices, costs and required investment. We would consider limited energy exposure when the inflation or supply case supports those cash flows. [33]

Gold is less dependable as a general rising-yield hedge: GLD lost 16.0% during the selected 2016 window. Inverse Treasury funds demand a different discipline altogether. TBT targets a daily −2× return; its issuer warns that longer-period results can differ significantly because of the return path. We regard it as a tactical hedging instrument. [16][34]

We also reject blanket short calls on REITs, utilities or growth shares. Financing costs and discount rates create pressure, but the timing and starting valuation matter. Realty Income’s approximately 91% fixed-rate debt share illustrates how refinancing exposure can be delayed. [35]