Stock Investors Are Unwinding a Big Fed Trade as Yields Slide

(Bloomberg) -- The popular ‘buy banks, sell utility stocks’ strategy, built in anticipation of higher interest rates, is unraveling.

Utilities were the only gainers in the S&P 500 Index on Wednesday, with the industry that’s seen hurt most by rising Treasury yields heading for its longest rally since November. Financial shares, beneficiaries of higher borrowing costs, sank 1.4 percent for a third day of declines.

The reversal makes sense as 10-year Treasury yields pull back from four-year highs, boosting the relative appeal of the steady dividends from utilities. While a blip on a long-term chart of their relative performance, it’s a headache to equity investors who raised bearish bets against the industry this year while pouring $3.6 billion into exchange-traded funds that focus on financial shares.

The premise underlying the trade is likely to face further scrutiny as the Federal Reserve meets on monetary policy next week. The most recent reports from payrolls to consumer prices have shown no signs of accelerating inflation, suggesting that optimism over faster rate hikes may be misplaced.

To be sure, the strategy of buying banks against utilities still shows decent returns in the past year despite this week’s rotation. Financial stocks have risen 17 percent while power producers are down about 2 percent.

To contact the reporter on this story: Lu Wang in New York at lwang8@bloomberg.net.

To contact the editors responsible for this story: Arie Shapira at ashapira3@bloomberg.net, Sarah McDonald

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