As we all know, the bond yields on the 10 and 30 Year U.S. Treasury Notes have spiked higher recently. The recent spike higher in yields has affected many leading stocks and sectors that take advantage of the easy money policies by the Federal Reserve. Easy money means cheap money to many companies.
One of the important sectors which is highly sensitive to interest rates is the utility stocks. Traders can easily see the recent action in the Utilities Select Sector SPDR (NYSEARCA:XLU). This sector is trading basically inverse to the 10 year U.S. Treasury yield. The XLU topped out on April 30, 2013 at $41.44 a share. This is the same day that the U.S. Treasury yield bottomed out. The XLU is now trading into some daily chart support so a bounce is likely to occur soon. Traders can see the same type of pattern in leading utility stocks such as Duke Energy Corp (NYSE:DUK), American Electric Power Co Inc. (NYSE:AEP), and Southern Company (NYSE:SO). Remember, all of the utility companies are highly levered and are very sensitive to higher interest rates.
Another leading sector that is interest rate sensitive is the housing and real estate sectors. Just take a look at the leading home-builder stocks recently and you will see the declines in stocks such as Lennar Corp (NYSE:LEN), and Toll Brothers Inc (NYSE:TOL). REITs (Real estate investment trusts) have also plunged lower on the back of higher bond yields. Leading mortgage REITS such as Annaly Capital Management Inc (NYSE:NLY), ARMOUR Residential REIT Inc (NYSE:ARR), and Invesco Mortgage Capital Inc (NYSE:IVR) have dropped recently.
Where do yields go from here? Bond yields will certainly move higher if the Federal Reserve begins to tapper its current quantitative easing program. Currently, the Federal Reserve is buying $85 billion a month worth of mortgage backed securities and U.S. Treasuries. So it is safe to say that yields have been held artificially low for quite a long time. Currently, yields are a bit extended on the charts, but should they begin to consolidate it would indicate that they are going to move higher. Traders better now watch the bond yields for clues to trade these important sectors.