Rate Sensitive Sector ETFs Suffer as Bond Yields Rise

Exchange traded funds that track rate sensitive sectors, such as utilities and real estate investment trusts, are under pressure as the ongoing bond rout pushed Treasury yields to their highest level in four months.

Yields on benchmark 10-year Treasury notes are not hovering around 1.86% after rising 22 basis points since the start of the month.

“You have more and more signs of an upward trend in inflation, and this is one risk that markets are not pricing,” Franck Dixmier, global head of fixed income at Allianz Global Investors, told the Wall Street Journal.

Bonds are sensitive to inflationary pressures as rising consumer prices make both the income and principle worth less over time.

The improving economy has also fueled expectations for a Federal Reserve interest rate hike in its upcoming December meeting.

“People are starting to look at interest rates and where they are, and they are getting a little nervous,” Charles Comiskey, head of Treasury trading in New York at Bank of Nova Scotia, told Bloomberg. “What you are seeing is what you haven’t seen in some time – lower pricing is attracting selling.”