By John Mylant
NEW YORK (TheStreet) -- The financial crisis that began in 2007 caused the Federal Reserve to reduce short- and long-term interest rates in an attempt to help stabilize the economy.
This led to traditional long-term fixed-income investments such as 10-year Treasuries to drop in value. According to the Treasury, a 10-year Treasury bond continued to drop in value, from a bit more than 5% in 2007 to less than 2% by mid-2012. Investors began to look toward dividend stocks as a way to get a better return.
A combination of good economic reports and Fed Chairman Ben Bernanke's mention of the possibility of tapering in his late May press conference brought a steady rise in interest rates. The 10-year Treasury was just under 2% in late May and pushed through 3% in early September.With low returns on bonds, investors have started shifting their money to more aggressive-growth investments that will pay them something more. Utilities, as measured by the SPDR Utility ETF (XLU), was hit hard by this shift. The utility sector is facing challenges, but it can still be a good investment. Investors have looked at utilities because it consistently produces dividends that hover close to 4%. In 2013, the economy seemed to be getting better, so investors moved away from this sector and poured their money into growth stocks. The sector's performance this year bears that out. In the first quarter, utilities had incredible growth. Since then, it has been a bottom dweller as far as sectors are concerned and is down almost 10% from its high in 2013. Because the utilities sector is so sensitive to interest rates, I would expect to see more volatility periodically while the Federal Reserve tiptoes its way through making a decision about what it is going to do with its monetary policy. When sentiment toward the interest rates shifted and Treasury yields climbed, this is when utilities started a downward trek.
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