Surging Treasury yields upend U.S. stock market’s ‘bond proxies’

Soaring Treasury yields have stunned the U.S. equity market in recent weeks, with some of the worst fallout hitting a group of stocks expected to have bond-like qualities.

Such areas are often referred to as “bond proxies” for their strong, stable dividends, which over the past decade have usually exceeded Treasury yields. Those hefty payouts, as well as businesses perceived to be more durable during a rocky economy, led many investors to view them as a safe harbor when markets grew turbulent.

Other areas known for their dividend appeal have also suffered, with real estate off 8% since the Fed’s meeting, and telecom stocks AT&T and Verizon dropping 7% and 8%, respectively. Bond proxies were underperforming after Friday’s U.S. employment report showed jobs growth surging above expectations and the yield on the benchmark 10-year Treasury shot up over 4.8%. Next Thursday’s consumer price index report will be critical for investors assessing whether the Fed will seek to raise rates further to fight inflation.

Earnings may not provide much relief for utilities. While the sector is expected to see stronger growth than the overall S&P 500 in the third and fourth quarters, its projected 8.6% increase in 2024 lags the expected 12% rise for the overall S&P 500, according to LSEG IBES.

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Surging Treasury yields upend stock market's 'bond proxies'Soaring Treasury yields have stunned the U.S. equity market in recent weeks, with some of the worst fallout hitting a group of stocks expected to have bond-like qualities. The S&P 500 is down about 4% since the Federal Reserve's hawkish interest rate projections last month sent U.S. yields to 16-year peaks and accelerated an equities pullback from highs reached in late July. While rising yields are generally seen as unfavorable to growth stocks, some of the steepest losses have been concentrated in more staid sectors such as utilities and consumer staples.
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