Realty Income Stock Climbs Back as Treasury Yields Retreat, Yet Challenges Persist

Realty Income (NYSE:O) stock continued its slow recovery this week as investors bought the dip and as US Treasury yields dropped. It jumped to $57.33, its highest level since September 17 and 7.87% from its lowest level this month. Still, the company and other REITs face substantial risks.

Realty Income Stock Rose as Bond Yields Fell

Realty Income is one of the biggest real estate investment trusts (REITs) in the United States. The company uses the triple net lease approach, where its tenants are responsible for covering costs like maintenance and taxes. The company counts companies like Sainsbury’s and 7 Eleven as clients. Most of its clients are grocery stores, convenience stores, home improvement, and dollar stores. 

Realty Income stock plunged a few months ago as US bond yields jumped, with the ten-year rising to the highest level in over two decades. Higher yields made REITs unattractive to investors and also boosted their interest expense.

Recently, however, the opposite has happened, with yields starting a comeback. The ten-year yield has dropped to 4.9% from the year-to-date high of 5.36%, while the two-year fell from 4.958% to 4.6%. The 30-year yield fell to 5.327% from the year-to-date high of 5.733%. 

Similarly, Realty Income’s borrowing cost has dropped a bit in the past few days. Its 2033 bonds are yielding 5.55% from this month’s high of 5.80%. Its 2032 bonds are also yielding 5.536%, lower than the year-to-date high of 5.87%.

The stock has rebounded because its core business is still stable, with the occupancy rate being over 98%. Also, it has become relatively undervalued, with the forward FFO falling to 13, its lowest level in months.

Realty Income Faces Some Potential Risks

The biggest risk that Realty Income stock faces is that bond yields may bounce back soon. For one, US government debt continues rising this year, while there are signs that the economy is slowing. 

The rising oil prices mean that inflation will remain above the 2% target in the foreseeable future, pushing the Federal Reserve to hike interest rates. Odds that the Fed will hike interest rates in December remain above 60% on Polymarket. 

Technicals also suggest that the stock has more downside to go. The daily chart shows that the rally is losing momentum, with the Average Directional Index (ADX) falling to 32.5 from this month’s high of 53.25. 

Also, the stock remains much lower than $59.58, where it formed a double bottom a few months ago. Realty Income is stuck below the 50-day Exponential Moving Average (EMA). It will remain under pressure as long as it is below these resistance levels.

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