Rate-hike odds sink to 32% as communication, real estate ETFs rally

Odds of a September Federal Reserve rate hike have sunk to 32.14 percent, per the CME FedWatch tool, lifting rate-sensitive sector ETFs.

"We expect Netflix to compound revenue at a double-digit growth rate, with content costs growing more slowly than revenue driving continued margin expansion," Bill Ackman, founder of Pershing Square, said in an investment letter.

The Communication Services Select Sector SPDR Fund (XLC) and the Real Estate Select Sector SPDR Fund (XLRE) were among the strongest-performing S&P 500 sector funds, rising 2.07 percent and 1.42 percent, respectively. XLC remains down about 4.8 percent year to date, while the disclosure helped push Netflix shares up more than 3 percent.

With much of REIT debt fixed-rate and average maturities extending beyond seven years, lower yields may not instantly cut interest expense but can lower future borrowing costs and support property valuations. The September Federal Reserve meeting now looms as the next test for sector allocation.

The year began with expectations of a rate cut, which gave way to inflationary pressure and a rate hike. Yet with the job market dipping into negative territory and inflation staying subdued, expectations have flipped again. The 10-year Treasury yield held near 4.68 percent, while elevated oil prices and Middle East tensions kept a floor under inflation concerns. Gold, meanwhile, dipped from a recent two-month high as investors weighed the shifting policy path. The easing rate-hike odds have paved the way for new equity highs, with the S&P 500 and Nasdaq tracking Wall Street's overnight rally.

Communication services is packed with long-duration cash-flow compounders. When yields fall, the present value of those future earnings jumps, giving names such as Meta Platforms Inc. and Alphabet Inc. a boost when "no hike" news hits the tape. The ETF offers exposure to secular technology growth through platforms, media and digital advertising, without relying exclusively on the most expensive semiconductor and hardware names. Netflix, which received a fresh boost from Ackman's disclosure, added momentum to the broader communication-services group.

Real estate is arguably the most rate-sensitive major equity sector. A decline in the 10-year Treasury yield can reduce the cost of debt financing, improve the relative appeal of dividend yields and support property valuations. Listed real estate investment trusts are entering this potential rate pivot with stronger balance sheets than before previous tightening cycles, with Nareit analysis indicating a relatively low debt-to-market ratio of 32.8 percent. That strength limits the sector's exposure to immediate refinancing pressure.

If lower yields encourage investors to pay more for future earnings, communication services may see significant multiple expansion. For real estate, lower yields can improve investor confidence, lower the cost of future borrowing and allow more operating cash flow to reach funds from operations. The shift in rate expectations also ripples through global markets, where real borrowing costs across major economies have climbed to multi-year highs as heavy government borrowing and large technology companies' AI spending increase bond supply.

This article is for informational purposes only and does not constitute investment advice.