The Effects Of Ultra-Low Bond Yields On Utilities



In the search for yield, Russ believes investors have pushed US utilities’ prices too high. His advice: Don’t overpay for yield.

As short-term interest rates remain at or close to zero, investors starved for income should be wary of overpaying for yield, particularly when it comes to US utilities.

I continue to prefer dividend funds and the global telecommunications sector for investors searching for yield. But some segments of the market – such as US utilities — are looking expensive and should likely be avoided.

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Market Realist – Low bond yields have caused asset price inflation.

The graph above shows ten-year and 30-year Treasury (IEF)(TLT) yields. Yields have been driven down by the Fed’s bond buying program, which included aggressive purchases of long-dated Treasuries as MBS (mortgage-backed securities). The ten-year Treasury is yielding 1.98% as of January 9.

International Treasury yields are also seeing a similar phenomenon. German ten-year Treasury recently touched negative territory, which was unprecedented. The Japanese ten-year has been hovering below the 1% mark. With most developed markets seeing low bond yields, investors are now searching for yield.

Ultra-low bond yields have have driven investors to riskier assets like equities (SPY) and high yield bonds (JNK). This has led to multiple expansion for most sectors, including the utilities (XLU). Also, the spread between high yield bonds and Treasuries had compressed to a record low recently. Both equities and high yield bonds have seen massive price inflation.

This series focuses on the utilities sector and the headwinds it could face in the coming months.


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