3 Utilities Funds To Buy On Widening Yield Curve Inversion

A rally in global bonds weighed on yields on May 29. Long-term government debt yields came in below short-term notes and bills. While, the 3-month bill yield increased to 2.362%, the yield on 10-year Treasury note fell to 2.26%, its lowest level since September 2017. The yield on the 10-year note, by the way, rose just 3 basis points on May 30 to settle at 2.27%, which is still low.

Such a phenomenon, also called the yield curve inversion, is an indicator of an impending recession. As a matter of fact, the yield curve inversion between 3-month Treasury bill and the 10-year Treasury note increased to its highest levels since the financial crisis.

Meanwhile, trade tensions between the United States and China escalated further on May 29 after China’s state media hinted that the country was considering using its supremacy in rare earth minerals as a weapon in the trade war against America. China owns about 40% of the global rare earth mineral resources. This “veiled threat” by the Chinese media targets America’s technology and defense industries.

Such events often find investors scurrying toward safe-haven sectors that have already emerged as preferred investments. One of the most-popular, safe-haven sectors is utilities. This sector comprises companies that provide telephone, gas, water and electricity services.

In this context, investors looking for stable dividend and interest income can opt to invest in mutual funds having significant exposure in utilities stocks.

Why Not Invest in Bonds Instead?

The current interest rate environment, in which long-term debt instruments have lower yields compared to their short-term counterparts, investors prefer holding cash. This is because the future appears bleak at this point and investing in short-term securities would lead to momentary gains provided the Fed does not lower interest rates in the near term.

However, there is widespread speculation among market-watchers that weakness in the economy might lead to lowering of interest rates by the Fed. However, this hypothesis is just arising out of skittishness in the current scenario. Also, it has been observed that historically, inversions of the yield curve have led to many a recession in the United States.

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