One Last Push

Income investors’ heads must be spinning.

Fresh off utility stocks’ strongest run since last July, the sector fell as much as 1.7% during Wednesday’s trading session, before regaining some lost ground.

And this wasn’t just a matter of traders catching their breath after an extended rally. Once again, shifting expectations about the Fed’s next rate hike are roiling bonds and dividend stocks.

At the end of last week, traders were betting that the central bank wouldn’t raise rates again until its May meeting.

Sure, some speculators had been adjusting their positions in recent weeks, with the Fed’s next meeting on March 15 starting to attract interest. But as recently as last Friday, trading activity suggested just a 40% probability of a rate hike in March, based on futures data aggregated by Bloomberg.

Meanwhile, the bond market was practically broadcasting its expectation that our customarily cautious Fed chief would once again defer on raising rates, despite her claim that the March meeting would be “live.”

Doves No Longer

But all that changed this week. In what one Jefferies economist surmised was a “coordinated effort,” key Fed policymakers were making headlines with notably hawkish pronouncements about the central bank’s monetary policy—or at least what passes for hawkish by ivory-tower standards.

The bond market’s perfect storm began with gathering clouds last week, when Fed Governor Jerome Powell affirmed that the bank could decide to act in March.

That was followed by remarks from Philadelphia Fed President Patrick Harker asserting that the economy is “more or less back to full health” and that three rate hikes would be appropriate this year.

Then came more positive pronouncements from New York Fed President William Dudley and San Francisco Fed Chief John Williams.

Williams said the Fed would give “serious consideration” to a rate increase in March, while Dudley said monetary tightening has become “a lot more compelling.”

Jefferies characterized the latter remarks as about as “hawkish and specific as you’re going to get” from Dudley. See—we told you that hawkishness is relative when it comes to economists.

Lastly, Fed Chief Janet Yellen is set to deliver a speech this Friday, which could offer an even clearer signal to the market.

In the interim, this rising chorus caused futures traders to dramatically reset their bets. There’s now an 80% probability that the Fed’s March meeting results in a rate hike.

Fed jawboning also triggered a selloff in government bonds, with the yields on benchmark 10-year Treasuries up about 15 basis points since last Friday. That may not sound like all that much, but in the world of bond trading that’s a big move.

The Trump Trade’s New Wind

In addition to the Fed, income investors have also been contending with the Trump Trade, which has driven the broad market to new highs as investors anticipate government goodies ranging from tax cuts to a $1 trillion infrastructure plan. The Trump Trade got another boost following the president’s speech to Congress on Tuesday night.

The prospect of fiscal stimulus is prompting the market to discount the possibility that rate increases could come more quickly than the gradual pace that the Fed has forecast.

However, with a continuing lack of clarity regarding policy specifics, investors seem to be projecting their own hopes onto fiscal stimulus. The reality is that tax cuts and other stimulative measures might take a bit more time and be somewhat less effective at driving growth than the market anticipates.

But even if the Trump Trade is running on fumes and the Fed proves to be less hawkish than its words would suggest, utility investors must still prepare for the eventuality of rising rates.

To that end, in the latest issue of Investing Daily’s Utility Forecaster, we identified 10 utilities that are ready for rising rates.

In fact, many of these names are strong enough to handle just about any environment, whether we’re about to enter a new growth cycle or continue muddling through the malaise of the New Mediocre.

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