The utilities sector usually is not associated with excitement, but the sector is on a roll and is breaking out on a technical basis. The Utilities Select Sector SPDR (NYSEArca: XLU), the largest utilities sector exchange traded fund, is up 8.4% year-to-date and more than 2% over just the past week.
Previously, XLU and rival utilities ETFs languished on the basis that fixed-income instruments more attractive on a relative basis, and bond-like equities, like utilities, less enticing. The bond-esque utilities sector has also weakened alongside the fixed-income market as Treasury yields rose on the Fed outlook and inflationary pressures.
The good news is that investors keep gobbling up U.S. Treasuries and many bond market observers are betting the Fed does not have the latitude to raise rates again this year, which would be a boon for utilities stocks and ETFs.
“The past few days of outperformance for XLU are highly interesting because utilities are traditionally a countercyclical sector. Utes seem to be breaking out here as the yield curve narrows,” reports ETF Daily News. “The yield curve, of course, illustrates the difference in interest rates between short term bonds (typically 2-Year Treasuries) and long term bonds (10-year Treasuries). The spread between these two benchmark interest rates has shrunk to a post-election low of just 97 basis points, mostly as a result of the 10-Year yield falling significantly.”