As Yields Hit 3%, Stocks That Were Meant to Fall Are Outshining

(Bloomberg) -- You didn’t need a crystal ball to know 10-year yields would hit 3 percent sooner or later.

It finally happened on Tuesday, and stocks behaved nothing like what they were expected to.

Seconds after the yield reached a psychologically important level at 9:48 a.m. in New York, the sectors reacted as expected: telecom, utilities and real estate firms, whose relatively high dividends are attractive in a lower-rate environment, sold off. Banks, which make more money when rates increase, rallied.

And then it changed: the S&P 500 Telecommunication Services Index rose 1.5 percent, triple the 0.5 percent advance in S&P 500 Financials Index as of 12:16 p.m. in New York. Utilities advanced 0.7 percent in the best rally in six sessions. Rate-sensitive real estate companies gained 0.3 percent.

As Yields Hit 3%, Stocks That Were Meant to Fall Are Outshining

The text-book example of high-dividend stocks retreating on rising rates didn’t materialize on Tuesday for two reasons. For one, it’s because of the earnings: telecoms are marching higher after Verizon Communications Inc.’s first-quarter EPS beat the highest estimate. Another reason utilities and real estate companies aren’t selling off is because higher rates have already been priced in, according to Donald Selkin, chief market strategist at Newbridge Securities Corp.

“You would expect to see a different chart on a day when the rates finally hit 3 percent,” Selkin said. “Verizon is pushing the telecom sector higher. In general, we’re not seeing the rate-sensitive stocks selling off because most of the rate move has already been priced in.”

What was expected was that yields reaching 3 percent would trigger automatic trading by algorithms and high-frequency traders. Sophisticated investors probably used the algos to trade on the yields reaching 3 percent, according to Frank Cappelleri, senior equity trader at Instinet LLC, though it’s hard to quantify how big the trading was.

The turnover in consumer staples stocks, at 2.1 billion shares as of 10:35 a.m. in New York, was 30 percent higher than the average for the past month during that time of the year. About 2.2 billion shares in the KBW Bank Index changed hands as of 10:35 a.m., 10 percent more than a 30-day average of 2 billion shares at this time of the day. By early afternoon, the indexes’ share turnover had subsided and was on par with the 30-day average with that time of the day.

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