10 Financial Stock Picks for Rising Rates From UBS

NEW YORK (TheStreet) -- With long-term U.S. Treasury yields on the rise, investors need to consider which portions of their portfolios will fare best under long-term and short-term scenarios.

Long-term U.S. Treasury securities were trading at a yield of 1.81% Tuesday morning, with yields as high as 1.91% on Jan. 3, rising from a range of 1.60% only a month earlier. During this painful economic cycle, U.S. Treasury yields briefly went as low as 1.38% in July.

UBS analyst Brian Meredith late on Monday said that his firm's "economics team expects increases in U.S. interest rates (10-year Treasury yields up 60bp in 2013 and again in 2014) and a steepening yield curve." The steepening yield curve would, of course, benefit lenders and would fit in with the Federal Reserve's recent actions.

The central bank in December announced that it would continue its purchases of mortgage-backed securities at a pace of $40 billion a month, and would also continue buying back long-term Treasury securities, "initially at a pace of $45 billion per month," however, the Fed stopped its simultaneous monthly sales of $45 billion in short-term Treasuries, which is likely to have the effect of increasing demand and holding short-term rates down.

UBS expects "increases in longer-term U.S. interest rates and a steepening yield curve," forecasting for "year-end 10-year Treasury note yields to rise from 1.8% in 2012 to 2.4% in 2013 and 3.0% in 2014 (as shorter-term Treasury yields remain little changed during the next few years)."