Rising bond yields are rattling markets, luring investors with attractive rates while exerting pressure on pockets of equities such as the real estate and utilities sectors.
“Elevated Treasury yields have dragged on relative performance for REITs and utilities,” said Katie Stockton, founder of technical research firm Fairlead Strategies, in a note Wednesday.
The Real Estate Select Sector SPDR Fund XLRE, which tracks an index of real estate investment trusts, or REITS, and real estate stocks, has dropped 3% this quarter through Wednesday, according to FactSet data. The Utilities Select Sector SPDR Fund XLU has tumbled a steeper 5.5% over the same period.
Both funds are down this year, with the utilities ETF particularly hard hit.
“REIT proxy XLRE is range-bound, but utility proxy XLU has a decisive breakdown,” said Stockton, referring to the ETF tickers for each sector of the stock market.
“Should yields enter a consolidation phase, that should provide temporary relief from their underperformance, but we cannot make a case to add exposure to REITs or utilities given downside momentum behind” the two ETFs, she said.
Investors traditionally view utilities as a defensive area of the stock market that may fare relatively well in an economic downturn. In this year’s surprisingly resilient economy, the S&P 500’s utility sector is the U.S. stock index’s worst performing by far, sinking 13% so far in 2023, according to FactSet data.
Read: Growth in U.S. services sector accelerates in August, ISM survey shows
While REITs have been under recent pressure, with the Real Estate Select Sector SPDR Fund falling 1% this year through Wednesday, shares of homebuilders have soared in 2023 even with their sharp selloff on Tuesday.
The iShares U.S. Home Construction ETF ITB has surged 39.2% in 2023, after dropping 4.6% on Tuesday, according to FactSet data. The SPDR S&P Homebuilders ETF XHB saw a 3.9% fall on Tuesday but remained up 34.9% for the year through Wednesday.
The new home market may be the best option for prospective buyers amid high mortgage rates as builders may “buy rates down,” according to a note last month from Renaissance Macro Research.
See: Home-builder ETFs jump after data show new-home sales rose in July despite high mortgage rates
RenMac’s head of technical research Jeffrey deGraaf said in a note Wednesday that “trends in both homebuilding and building products remain positive, but negative volatility alerts are indications of saturation.”
Meanwhile, rising Treasury yields have broadly dented stock-market valuations while taking a bite out of returns in the bond market. Bond prices and yields move in opposite directions.
The yield on the 10-year Treasury note BX:TMUBMUSD10Y has jumped 46.3 basis points this year through Wednesday to 4.289%, according to Dow Jones Market Data.
Treasury yields have been on the rise as the Federal Reserve tightens monetary policy to bring down elevated inflation. Treasury bonds, which are issued by the U.S. government, have been attracting investors with so-called risk-free rates that have soared over the past 18 months.
For example, six-month Treasury bills BX:TMUBMUSD06M were yielding around 5.5% on Wednesday afternoon, according to FactSet data, at last check.
More broadly, the iShares Core U.S. Aggregate Bond ETF AGG, which tracks an index of investment-grade bonds in the U.S., fell slightly on Wednesday to further erode its year-to-date gains. The fund has posted a 0.4% total return this year.
Meanwhile, the U.S. stock market closed lower Wednesday as Treasury yields climbed, with the Dow Jones Industrial Average DJIA falling 0.6% while the S&P 500 SPX shed 0.7% and the technology-heavy Nasdaq Composite COMP dropped 1.1%, according to FactSet data.
