Surging Treasury yields upend stock market's 'bond proxies'

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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.

NEW YORK - 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. Next week also kicks off third-quarter earnings results for U.S. companies, with several major banks reporting. The earnings season could determine the near-term path for stocks, with the S&P 500 still logging a 10% gain for the year even after its pullback.

Weakness in utilities shares spells opportunity for some investors. The Philadelphia SE Utilities index indicates the group trading at its lowest relative valuation to the S&P 500 since 2010, excluding the initial coronavirus period in 2020, analysts at KeyBanc Capital Markets said in a note this week, adding "we now view the sector overall as attractively valued.

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