Introduction - a bullish view of the utes
On Friday, Seeking Alpha sent to my e-mail inbox a "Must Read" article titled Utilities And XLU: This Hated Sector Continues To Soar - A Great Exit Opportunity Now Exists. I thought this was especially relevant, as I had spent all week - and most notably Friday - increasing my electric/gas/renewable energy exposure notably. Having discussed these - which I will also just call "utes" (NYSEARCA:XLU) in this article, several times over the years, I thought that this might be a good time to weigh in again, both because Seeking Alpha highlighted that bear point of view, but also in view of the drop in 30-year T-bond rates to record lows Friday.
Note,
My core argument is 3-fold:
- long term rates continue in a bull (declining) trend
- the XLU has under-performed the S&P 500 (SPY) the past 10 years
- high-quality utes offer alpha in the current interest rate and growth environment.
Later in the article, I will provide some discussion of three of my largest utilities (not all of the ones I am long).
Before then, let's look at these points in order.
Bonds are still OK, but utilities look like more attractive total return vehicles
Friday, the most free-market part of the fixed income market, namely very long term bonds whose yield is virtually unaffected by Federal Reserve policy, dropped to the lowest yield ever:
For some reason, YCharts does not show rates back in the 1980s; the downtrend shown above began in Q2 1981. I have estimated about a 0.25-0.30% rate drop per year over the past 30+ years. Note, the chart's gap in the 2000s relates to a period where no new 30-year bonds were sold by the government.
The drop in rates has been accompanied by a
