Surging Treasury yields upend stock market's "bond proxies"
By Lewis Krauskopf
NEW YORK (Reuters) — Soaring Treasury yields have stunned the U.S. equity market in recent weeks, with some of the worst fallout hitting a group of stocks expected to have bond-like qualities.
The S&P 500 is down about 4% since the Federal Reserve's hawkish interest rate projections last month sent U.S. yields to 16-year peaks and accelerated an equities pullback from highs reached in late July.
While rising yields are generally seen as unfavorable to growth stocks, some of the steepest losses have been concentrated in more staid sectors such as utilities and consumer staples.
Such areas are often referred to as «bond proxies» for their strong, stable dividends, which over the past decade have usually exceeded Treasury yields. Those hefty payouts, as well as businesses perceived to be more durable during a rocky economy, led many investors to view them as a safe harbor when markets grew turbulent.
But surging bond yields have dulled the appeal of bond proxies. Investors can now earn higher yields on government debt seen as virtually risk free if held to term. The yield on a six-month Treasury now stands at around 5.6%, while the utilities sector was yielding 4% and staples yielded 3%, according to LSEG data.
As a result, shares of bond proxies have taken an outsize hit in recent weeks. The S&P 500 utilities sector has tumbled 13% since last month’s Fed meeting. Staples has dropped about 8% in that time, with investors also assessing the impact on consumer companies from a new class of weight-loss drugs.
Other areas known for their dividend appeal have also suffered, with real estate off 8% since the Fed's meeting, and telecom stocks AT&T (NYSE:T) and Verizon (NYSE:VZ) dropping 7% and 8%,
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