A slow-motion selloff in U.S. Treasurys turned into a rout this week, sending yields soaring and finally appearing to rattle stock market investors at least enough to contribute to a selloff that saw the Dow Jones Industrial Average fall by more than 300 points at its session low on Thursday.
In general, higher Treasury yields can eventually present a hurdle for equities as investors wrestle with the temptation of a more attractive risk-free return versus the risk of holding equities, though it is open for debate exactly where the pain point lies.
Read: 3 reasons why U.S. government bond yields are soaring
And, as the chart below from Renaissance Macro illustrates, not all stocks respond the same way in a rising rate environment.
Renaissance Macro
Financial stocks tend to be sensitive to yields in a positive way, with data showing banks, diversified financials and insurance companies reaping the biggest benefit.
The reason is relatively straightforward. In the case of banks, rising yields mean lenders can earn more from the spread between what they earn on holdings like Treasurys and the interest they pay on deposits. Insurance companies, meanwhile, earn more on their large bond portfolios.
At the other end of the spectrum, investments like real-estate investment trusts and utility stocks that are relied on for dividends and yield are among the groups that suffer worst from the competition provided by rising Treasury yields.
The selloff in Treasurys took the 10-year note yield TMUBMUSD10Y, +0.96% to just shy of 3.24% early Thursday, its highest since 2011. It remains up 3.1 basis points at 3.189% in recent trade after jumping 10 basis points on Wednesday. The 30-year T-bond yield TMUBMUSD30Y, +1.02% jumped Wednesday to its highest since 2014 and rose 2.9 basis points to 3.35% Thursday. At the short end, yields had already been trading at levels last seen in 2008.
Read: Bond king Jeff Gundlach says Treasury market is witnessing a ‘game changer’
Yields continued to move higher Friday after the release of September jobs data.
Check out: Bond markets may have overreacted to Powell’s ‘long way from neutral’ remark: Economists
Stocks fell sharply during Thursday’s session but pared losses ahead of the bell. The S&P 500 SPX, +0.02% ended 0.8% lower, while the Dow DJIA, -0.10% finished the day down 200.91 points, a fall of 0.7%, after declining more than 350 points at its session low. Stocks were struggling for direction Friday morning.
See: Bill Gross: This is why bonds are selling off
In Thursday’s action, financials stuck to the script by defying losses across most other sectors. The Financial Select Sector SPDR ETF XLF, +0.23% gained 0.7%, building on the previous day’s rise to post a 2% week-to-date advance.
“Banks in particular hadn’t been as strong as yields would suggest, and yesterday we highlighted their oversold condition despite the sector showing some of the weakest trends in the market,” said RenMac Chairman Jeff deGraaf, in a note. Small-cap banks were the biggest beneficiaries, with many rallying from oversold conditions.
“To be clear, banks trends are generally weak but, yesterday’s response gives them some rope for additional upside in the near term, and a trade at a minimum,” he said. “We’re doubtful that they regain leadership status for the rest of the year.”
Utilities, which had slumped hard the previous day, were bouncing back, however, perhaps buoyed by the defensive sector’s reputation as a haven in turmoil, analysts said. The Utilities Select Sector SPDR ETF XLU, +0.55% rose 0.5%, leaving it up 0.3% for the week.
