Yield-Sensitive Sectors Steamrolled, Eyeing TLT
Defensive-value niches of the S&P 500 were not all that cheap back in the summer of 2022. Consumer Staples traded with a forward operating P/E north of 20 while the uninspiring and often-safe Utilities space briefly had an earnings multiple above 22. Real Estate, meanwhile, has endured steep absolute and relative selling over the last many quarters as the ramifications of COVID's reshaping of the work environment continue to evolve.
I took a look at those three sector ETFs (XLP, XLU, XLRE) and plotted price action on the iShares 20+ Year Treasury ETF (TLT). The "long bond" sports a yield of just under 5%, and you'll find that TLT's yield-to-maturity is higher than that given its exposure to the 20-year bond (which almost always has a yield premium to the more liquid 30-year). The result of sharp Treasury-market selling since May, and particularly since the beginning of the Q2 earnings season in mid-July, is that so-called "defensive" sectors have been big losers.
I assert that if we see yields pare their gains into year-end, then the usual mid-October through early January rally could be led by this island of misfit sectors. Consider that the 5% mark on the yield curve is a key psychological level - I would not be surprised to see bond buyers step in over the next handful of weeks. All bets are off next year, though, as it appears a longer-term cycle of higher yields is in place.
I took a look at those three sector ETFs (XLP, XLU, XLRE) and plotted price action on the iShares 20+ Year Treasury ETF (TLT). The "long bond" sports a yield of just under 5%, and you'll find that TLT's yield-to-maturity is higher than that given its exposure to the 20-year bond (which almost always has a yield premium to the more liquid 30-year). The result of sharp Treasury-market selling since May, and particularly since the beginning of the Q2 earnings season in mid-July, is that so-called "defensive" sectors have been big losers.
I assert that if we see yields pare their gains into year-end, then the usual mid-October through early January rally could be led by this island of misfit sectors. Consider that the 5% mark on the yield curve is a key psychological level - I would not be surprised to see bond buyers step in over the next handful of weeks. All bets are off next year, though, as it appears a longer-term cycle of higher yields is in place.
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