The utilities industry group of the S&P 500 experienced a significant selloff, reminiscent of the peak Covid-19 fears in April 2020.
The SPDR Select Sector Utilities exchange-traded fund, which closely follows the utilities industry group on the S&P 500, recorded a sharp decline of 4.7%. At one point, it dropped by over 5%. Notably, this sector aligns closely with the Treasury market, where the yield on the 10-year note recently reached its highest level since 2007.
According to J.D. Joyce, president of Houston-based money manager Joyce Wealth Management, the interest rate surge appears to be the primary catalyst. Utility companies tend to carry a significant amount of debt, making them particularly sensitive to changes in interest rates. With the cost of capital increasing, Treasury bonds may now appear more attractive to investors seeking stable returns.
As Joyce points out, “Why take the risk of relying on utility payments when you can guarantee returns from Uncle Sam with U.S. Treasuries?”
The repercussions of this trend were evident as AES Corp., PG&E, and Dominion Energy all experienced drops exceeding 4%. NextEra Energy bore the brunt of the impact with a staggering 9% decrease, while NiSource faced a 6% decline.
It remains crucial for investors in this sector to monitor the evolving interest rate landscape closely.