The Utilities SPDR ETF (NYSE:XLU) is in focus today, as the sector index fund continues to break out of a three-month consolidation range.
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.
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.
While no one’s quite sure why bonds are acting like they are, higher-yielding sectors like Utilities seem to be benefitting, as the bond market signals that more interest rate hikes this year are getting increasingly unlikely.
The dividend yield for the S&P Utilities Sector currently sits around 3.5%, which is a massive 123 basis points above the current yield on the 10-Year Note.
It’ll be interesting to see how economic growth and inflation expectations evolve as a result. If the economy is indeed getting sluggish, it could prove to be a drag on future S&P 500 performance — and perhaps even more of a benefit for Utilities.
The Utilities SPDR ETF (NYSE:XLU) was trading at $52.63 per share on Tuesday afternoon, up $0.1 (+0.19%). Year-to-date, XLU has gained 8.36%, versus a 7.39% rise in the benchmark S&P 500 index during the same period.