Yields on 10-year U.S. Treasuries dropped 1.3% on Wednesday, but even with that modest decline, yields have surged 33.5% over the past three months. Many investors by now know that rising rates have plagued an array of sectors and asset classes, including REITs, particularly mortgage REITs, MLPs and consumer staples stocks.
Utilities stocks and ETFs belong on that list as well. As 10-year Treasury yields have surged over the past 90 days, the Utilities Select Sector SPDR (NYSEArca: XLU), the largest utilities ETF, has dropped 1.8%. XLU’s drop since July 30 is even more dramatic at 6.4 percent, a substantial decline in small amount of time for an ETF that is usually low beta and not highly correlated to the broader market. [Interest Rates Hit Utilities ETFs in Q2]
While the vulnerability of XLU and rivals funds like the Vanguard Utilities ETF (NYSEArca: VPU) and the iShares Dow Jones U.S. Utilities (NYSEArca: IDU) has been evident for several months, not all market observers are bearish on the sector. [Utility ETFs for Higher Dividend Yields]
MKM Partners has a somewhat favorable view of the utilities group.
“The 10-year U.S. Treasury yield has almost doubled since early May, reaching 3.0% last week after bottoming near 1.6%. Over the same period, related implied volatility across the curve as measured by the MOVE Index spiked twice toward 120 from a low of 50 in May. On a longer-term basis, the index is back into a sustainable range with a midpoint around 100. We interpret this to mean that Treasury yields are likely to stabilize relative to the violent move over recent months, when the worst-performing SPX industry groups were unsurprisingly the most interest ratesensitive: real estate (-11.8%), telecommunications services (-9.9%) and utilities (-6.4%). We think the combination of lower rate volatility and positive short-term technical setups makes for a tradeable rally in these industry groups,” according to note from the firm posted on Barron’s.