Consequently, with yields rising, more rate sensitive market sectors are beginning to weaken.
REITs, which are traditionally popular for their attractive dividend yields, have been under pressure as improved U.S. economic data fueled inflationary pressures and speculation of a pending Federal Reserve interest rate hike. When interest rates rise, REITs’ interest payments go up, so the companies have less cash flow available for dividends. The high dividends in REITs are attractive in a low-rate environment but are less enticing once safer Treasuries show higher rates.
Meanwhile, the Utilities Select Sector SPDR (NYSEArca: XLU) decreased 0.8%, Vanguard Utilities ETF (NYSEArca: VPU) was down 0.6% and First Trust Utilities AlphaDEX Fund (NYSEArca: FXU) was 0.6% lower on Thursday.
The bond-esque utilities sector has also weakened alongside the fixed-income market as Treasury yields rose on the Fed outlook and inflationary pressures. Once the Fed eventually hikes interest rates, the higher rates will make fixed-income instruments more attractive on a relative basis, and bond-like equities, like utilities, less enticing. Consequently, utilities may remain flat or underperform other segments of the equities market once rates start ticking higher.
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