Realty Income Corp (O): Why Does the Market Love U.S. Treasuries?

Another slammed sector

Utilities show even stronger correlation to Treasury yields, because regulated utilities are financing companies in disguise. Utilities have only minor economic exposure; electricity and gas demand is fairly stable in booms and busts. Thus, the most important metric is the spread between financing costs for major investments and earnings from the sale of utility services.

The Utilities SPDR linked an impressive succession of up days in 2013 to rally all the way to May 1, when US Treasury yields sunk to a 2013 low of 1.61%. As rates rose through May and June, utilities as a whole declined by nearly 8%.

XLU data by YCharts

Once again, the spreads between riskier utility dividends and U.S. Treasury Note yields compressed. Utility stocks fell in response. Utilities yield 3.8% vs. 2.17% for the 10-year Treasury. Given recent market volatility, 2.17% in risk-free assets isn’t such a poor alternative to modestly higher utility dividend yields.

Stock investors cannot ignore bonds

Investors should not ignore the hidden risk in so-called “safe haven” stocks. The only truly safe asset is U.S. Treasury debt, so the yield on this very important asset sends shockwaves through the rest of the market.

When the market is rising month after month, it’s easy to forget that stocks are the riskiest of asset classes – even “safe” REITs and utility companies. However, sentiment can reverse quickly when tempted with higher bond returns.

The article Why Does the Market Love U.S. Treasuries? originally appeared on Fool.com and is written by Jordan Wathen.

Jordan Wathen has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Jordan is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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