Utilities outperform broader markets
Utilities continued their upward march and outperformed broader markets last week. The Utilities Select Sector SPDR ETF (XLU), which tracks the S&P 500 Utilities Index, gained 2.3%, while broader markets rose 1.3% during the week.
The minutes from the FOMC’s June meeting released on July 5 suggested that the Fed might continue to raise rates on a regular basis even amid increasing trade war fears. Trade war concerns also made investors nervous, which made them take shelter under defensives like utilities. Utilities are preferred by investors due to their relatively higher dividend yields and almost entire domestic operational exposure.
The utility sector is among the most vulnerable to interest rate hikes. The sector seems strong despite the recent rate hike in mid-June. Rising interest rates result in debt servicing expenses for utilities, which dents their profitability.
Leaders and laggards
The ten-year Treasury yield trended lower last week and closed at 2.82%. Treasury yields and utility stocks usually trade inversely to each other.
Utilities at large have risen more than 10% in the last month and almost 2% year-to-date. As the trade war fears intensified, broader markets trended lower in the past month.
Corrections: An earlier version of this article suggested that the Fed might go slow regarding rate normalization instead of continuing to regularly raise rates. It also claimed that utilities’ recent rally might continue on a slow rate hike pace.