Why The Yield Curve Matters To Utilities & Other Bond Proxies

This chart of the U.S. 10s/2s curve and the SPDR S&P Utilities Sector ETF ( XLU ) is interesting. A few days ago, I was reading a blurb by a well-known outlet about utilities getting "smoked" during the Q4 equity route. Like above, performance is relative to time frame. Additionally,  you have to have a deeper understanding about what XLU is and what it can do.

It's not enough to just assume utilities as "defensive" thus it protects you from a broad equity sell-0ff. This also coincides with some questions I get from subscribers: why advocate holding XLU and TLT?

Yes, XLU is a bond proxy but it is not a bond. Its underlying is composed of equities. The TLT is composed of U.S. 7-10 year treasuries.

They both perform well under low interest rate environments when yields trend lower. However, keep in mind that the XLU is still equity-based and won't protect you fully.

Notice, XLU didn't blink until the 10s/2s began to steepen. It's been gung-ho since the curve flattened out. And if we went back through periods were the curve began to steepen, it effected other bond proxies much more dramatically like REITs.

Flattening of the curve isn't the issue unless you're financials. It's the massive steepening caused by the Fed cutting interest rates that kill markets.
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- The Macro Strategist
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