FOUR-MONTH HIGH IN THE 10-YEAR TREASURY YIELD LIFTS FINANCIAL SPDR TO SIX-MONTH HIGH AND THE DAY'S STRONGEST SECTOR -- BUT MAKES UTILITIES THE DAY'S WEAKEST SECTOR
RISING BOND YIELDS HELP FINANCIALS, BUT HURT UTILITIES... This morning's message suggested that this week's upside breakout in bond yields was helping financial stocks which were the day's strongest sector. The green bars on top of Chart 1 show the 10-Year Treasury yield surging to the highest level in four months and nearing a test of its May high. An upside breakout through that spring high would put bond yields at the highest level in seven years and signal even higher bond yields. Financial stocks are usually the main beneficiaries of higher bond yields. And they certainly were today. The middle box shows the Financial Sector SPDR (XLF) surging nearly 2% to the highest level in six months. That's a bullish breakout for the group. But there's a downside to rising rates. Bond proxies like utilities lose their appeal when rates are rising and bond prices are falling. It's no coincidence that on the same day thet financials were the day's strongest sector that utilities were the weakest. The lower box shows the Utilities Sector SPDR (XLU) falling more than 2% today to undercut its 50-day average (blue line) for the first time in three months. Staples and REITS, which also pay high dividends, are in the red today. They usually underperform when bond yields are rising.
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Chart 1
