Stocks have come roaring out of the gate to start 2018 as the bull market extends to unprecedented heights. Momentum and volatility-agnostic investors have been treated to a continuation of the same strong trends that dominated last year’s markets. Yet, even with so much enthusiasm spread among the major diversified indices, there remains lackluster sentiment for many interest-rate sensitive stocks and sectors.

Interest-rate sensitivity has traditionally been the realm of fixed-income, where bond prices and bond yields are negatively correlated. Nevertheless, there are many areas of the U.S. equity markets that also key in to the fluctuations of U.S. Treasury yields. The foremost of which are utility, REIT, and financial stocks.

The connection has always been that rising yields are a net positive for financial stocks. This dynamic creates wider margins on traditional banking, financing, and insurance-related activity. The exact opposite is true for the utility and real estate sectors. Both of which rely heavily on debt and collateral obligations to fund growth and ongoing business operations. Those conventional correlations have continued to stand up over the last three months as the 10-Year Treasury Yield swung from an October low near 2.275% to a new cycle high of 2.65%.

This jump in interest rates, while not overly catastrophic to diversified bond investors, has put a damper on funds such as the Utilities Select Sector SPDR (XLU). This exchange-traded index fund tracks a basket of 28 large-cap utility stocks from within the broader S&P 500 Index. Top holdings include companies such as NextEra Energy Inc (NEE), Duke Energy Corp (DUK), and Dominion Energy Inc (D).

Since topping out in mid-November, XLU has tumbled over 12% and recently hit new year-to-date lows. It’s also notable that this fund is the only major S&P sector below its long-term 200-day moving average.

The most interesting thing about this decline is that it has occurred as the rest of the market has continued to push to new all-time highs. The lone dynamic of interest rates has taken their toll on utilities as investors pullback their risk appetites for these stalwart companies.

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