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What’s Ahead for Utilities as Fed Raises Rates for Third Time?

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What’s Ahead for Utilities as Fed Raises Rates for Third Time? PART 1 OF 3

How Did Utilities, Equities, and Bonds Respond to Rate Hike?

Fed raises rates by 25 basis points

The Federal Reserve raised its benchmark interest rates by 25 basis points on March 15, 2017. The Fed’s move once again underlined that the US economy is on a growth path. The Fed funds rate is now in the range of 0.75% to 1%. This was the Fed’s third and most anticipated increase towards rate normalization after the financial crisis in 2008.

Surprisingly, interest-rate-sensitive utilities (XLU) rose 1.6% on March 15, while broader markets (SPX-INDEX) managed to rise 0.9% for the day. The financial sector (XLF), which tends to benefit from higher interest rates, closed the day with a marginal loss.

How Did Utilities, Equities, and Bonds Respond to Rate Hike?

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Markets rally as Treasury yields fall

The chart above shows how the S&P 500 Utilities Index reacted after the Fed decided on a rate hike. Utility giants Duke Energy (DUK) and Southern Company (SO) rose 1.5% while independent merchant power player NRG Energy (NRG) rose 2.7%. AES (AES) surged 2.8% for the day.

Equities showed strength, but the ten-year Treasury yield fell to 2.5% despite a rate hike. Broader markets rallied most likely as market participants were expecting a more aggressive tone from the Fed that would have hinted at a faster-than-expected pace of rate increases ahead in 2017. However, according to the Fed, we could still see three more hikes this year. After the 2016 rate hike, the Fed has turned more hawkish and has been suggesting multiple hikes in 2017.

Fed chair Janet Yellen said that the Fed remains data dependent on rate hike decisions ahead and that we won’t see a forceful tightening.

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