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How the Strong Possibility of a Rate Hike Affects US Utilities

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Fed hike almost certain?

According to CME Group, the possibility of a Federal Reserve rate hike this week has risen over 90%, a dramatic jump from a month ago. The Fed funds rate could rise to the range of 0.75%–1% if it sees an increase of 25 basis points.

The US ten-year Treasury yield reached 2.60% on March 10, 2017, after hitting a low of 2.31% on February 24, 2017. Utilities, which are sensitive to interest rates, showed distress during most of the week ended March 10, 2017, ahead of the Federal Reserve’s meeting scheduled for March 14–15.

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Utilities ahead

The Utilities Select Sector SPDR ETF (XLU) has gained 4% so far during 2017. XLU has underperformed the broader markets, which surged 6% during the same period.

The increased possibility of an upcoming rate hike could bring temporary weakness to utilities. However, the Federal Reserve seems to be holding a surprisingly hawkish stance. The Fed’s aggressiveness suggests that its target of multiple hikes in 2017 may turn into a reality.

Utilities are generally considered as bond proxies due to their relatively higher and stable yields compared to the broader markets (SPY) (SPX-INDEX). With a high possibility of a rate hike this week, bond yields could surge as they have during the last several trading sessions. Yield-seeking investors may turn to bonds, putting utilities under pressure.

Let’s see how utilities stocks (DUK) (NEE) (SO) and their yields could look.

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