Economics Newsletter: Reassessing Stock Sector Performance amid Rising Treasury Yields

U.S. 10-year Treasury yields are on the cusp of breaking 2024 highs (currently around 4.31%), following CPI and PPI data that reflected larger than expected increases in inflation last week. These yield increases most immediately impacted “bond proxy” sectors of the stock market: real estate, consumers, and utilities. These sectors slumped in recent trading last Thursday.

Investors are often drawn to stocks in the aforementioned sectors because they offer attractive dividend yields. These dividends, however, have been eclipsed by higher Treasury yields.

Last Thursday’s slump is not a contained incident. Over the past year, 10-year Treasury yields have increased by around 90 basis points, and Treasury yields generally are up across the curve. These rising yields have given investors alternatives for attractive sources of income outside of dividend stocks. Consequently, this has likely contributed to changes in certain sectors of the stock market, specifically utilities. Utilities stocks declined 13% in 2023, in stark contrast with an S&P 500 that gained 17%. As the chart below reflects, there appears to be an inverse relationship between 10-year yield moves and utilities performance.

Other than disrupting the stock market, rising bond yields should be monitored for the other implications they carry. They can exacerbate existing sovereign debt, contribute to political gridlock, and fuel declining confidence in the U.S. dollar. Obviously, yields themselves are not a scapegoat. However, they can serve as an indicators of potential economic, political, and reputational issues.

Sources: Karen Langley, WSJ; Karen Langley, WSJ; Market Watch; FRED; Seeking Alpha; Hugo Dixon, Reuters; Reade Ben, Manhattan Institute

Reade Ben is a policy analyst at the Manhattan Institute.

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