More economic growth
US utility stocks slipped 0.8% on May 15 after ten-year Treasury yields peaked at 3.1%—a seven-year high. Broader markets also corrected 0.7% during the day. A strong increase in US retail sales in April highlighted more economic growth in the country.
Utility stocks generally trade inversely to Treasury yields. The ten-year Treasury yield is widely watched as an indicator of mortgage rates. The stronger US economy, as shown by recent economic indicators, might make the Fed even more aggressive.
According to the CME’s FedWatch tool, there’s a 95% possibility of the Fed increasing interest rates by another quarter-point in the June meeting. Traders are predicting three more rate hikes this year. The Fed increased rates by a quarter-point in March.
Utility stocks continued to trade weak
The Utilities Select Sector SPDR ETF (XLU), which tracks the S&P 500 Utilities Index, has fallen more than 5%, while broader markets have risen almost 3% year-to-date.
During an interview with Bloomberg, Jamie Dimon, JPMorgan Chase’s CEO, predicted last week that benchmark interest rates would reach 4%, which caused a notable drop in utilities last week.
Higher interest rates could make utilities less attractive to bonds. Due to utilities’ heavy capital expenditure needs, higher interest rates make their debt servicing expensive, which eventually dents their profitability.
To learn how utilities are placed amid the challenges, read S&P 500 Utilities: What Sizzled and What Fizzled Last Week.