Record Spread Between Bond and Utility Yields

From the desk of Matt Mondoux, CFA, CMT, CFP®

Utility stocks tend to be the most interest rate sensitive of all domestic equity sectors. The chart below shows the historical 10-year relationship between the dividend yield of the S&P U.S. Utility Index and the interest rate on the U.S. 10-Year Treasury Bond. Directionally speaking, as interest rates have fallen, so has the dividend yield on Utility stocks – driven by increasing price performance. However, since late February, we have seen new lows in interest rates, but not the Utility sectors dividend yield. Does this speak more to relative value between the Utility sector and Treasury Bonds or to the impact the Fed’s asset purchases have had on the bond market?