Interest rates are rising, and it's time to pay attention not just to how high rates might climb, but why.

The 10-year Treasury yield is now at 4.72%, up more than 0.57 percentage points from the start of the year. Meanwhile, Wall Street seems increasingly confident the Federal Reserve will step in to raise short-term interest rates next month, after Chairman Kevin Warsh emphasized inflation concerns in his speech last week at the central bank's annual Jackson Hole gathering.

Rising rates tend to slow economic growth and push up borrowing costs for companies, raising questions about what stocks can thrive if rates continue to climb.

The answer changes based on the circumstances, according to a recent note by Ned Davis Research.

NDR noted that when growth expectations drive inflation, stock prices and 10-year Treasury yields often climb at the same time-a positive correlation. However, when yields are rising because the market is nervous about persistent inflation, yields and stock prices typically move in the opposite directions.

That is what has happened lately, with the correlation between yields and stock prices turning negative after the U.S. attacked Iran in late February and growing more so since then.

That could have big implications for stock market leadership, according to NDR's study of historical market returns. When stock prices and bond yields rise together, financials is the sector most positively correlated to bond yields, suggesting prices for financial stocks surge alongside bond yields.

But when stock and bond yields move in opposite directions, as they have lately, financial stocks show the most negative correlation to bond yields, according to NDR. The reasons shouldn't be hard to fathom. Banks make money by taking short-term deposits and making long-term loans. When short-term interest rates rise, as they do when the Fed hikes rates to fight inflation, bank profit margins are compressed.

The "financials sector has responded particularly poorly to rising inflation regimes," wrote NDR strategist Rob Anderson in an email. "There are fundamental reasons for this as the sector's earnings growth has tended to be the most negatively impacted, on average."

So far this year, the record for financials is mixed. The State Street Financial Select Sector SPDR ETF has returned 7%, lagging behind the broad market's 13.4% return, dragged down, in part, by weak returns from private asset managers. But the Invesco KBW Bank ETF has done better, gaining 15.5%.

Despite worries the Fed will hike rates later this year, the bond market's yield curve remains steeper than it was a few years ago, when the Fed was steadily lifting rates to fight the post-Covid price surge. That has helped bank profits, since banks borrow short and lend long. Still, a hike to short-term interest rates by the Fed later this year could flatten the yield curve again-compressing bank profits, and hurting stock prices.

What stocks are mostly likely to ride out the current rise in rates? Defensive sectors such as those targeted by State Street SPDR S&P sectors funds (or similar ones by iShares and Vanguard) appear to hold up the best.

These sectors won't necessarily benefit from rising rates, but shouldn't be hurt either, according to NDR.

"When the stock/bond yield correlation has been negative...the correlations for consumer staples, utilities, and health care have been close to zero," the firm noted.

All three sectors tend to be made up of companies with steady businesses that do comparatively well in weak economies. They also tend to throw off cash, which can offset price declines if the stock market turns volatile.

State Street Utilities Select Sector SPDR ETF, for instance, yields 2.8%, compared with 1% for the broader market. The State Street Consumer Staples Select Sector SPDR ETF yields 2.6%. The State Street Health Care Select Sector SPDR ETF 1.5%