It goes a little something like this for utilities stocks and exchange traded funds: Treasury yields rise and the utilities sector falls.
Ten-year Treasury yields are up 6.8% over the past month while the Utilities Select Sector SPDR (NYSEArca: XLU), the largest utilities ETF, has tumbled nearly 3%. Over the past 90 days, ten-year yields have jumped 14.2% while XLU is off 2.1%. Those recent declines have XLU at a critical technical juncture. [Crunch Time for Rate-Sensitive ETFs]
“When looking back over the past 20 weeks, the Dow Jones Utilities index is down over 13%. This represents the worst 20 week performance since 2009. This decline has taken utilities down to a support line that dates back to the 2009 lows,” according to Chris Kimble of Kimble Charting Solutions.
Interestingly, while XLU has absorbed its worst 20-week performance since 2009, the rate-sensitive iShares 20+ Year Treasury Bond ETF (NYSEArca: TLT) experienced one of the worst 16-week rate of change declines in its 13-year history. Long-term bonds are most at risk of a rate hike. For instance, TLT shows a 17.7 year duration – duration is a bond fund’s measure of interest rate sensitivity. Consequently, a 1% rise in rates could translate to about a 17.7% decline in TLT’s price. In contrast, bond funds with shorter durations would have a lower sensitivity to rate changes. [Bearish Bond ETFs Back in Style]
“As you know, Utilities are usually concerned about the direction of interest rates. I suspect that the sharp rise in rates over the past few months have had much to do with the weakness in bond prices,” adds Kimble.