Interest rates and utilities
US utilities were among the main beneficiaries of the near-zero interest rate environment over the last ten years. Utility operations are asset-heavy businesses that need significant external funding apart from cash from operations.
The expected rise in US interest rates could hamper utilities’ (XLU) profitability, given their higher outflows toward debt servicing.
The near-zero interest rate environment has resulted in low debt cost, which has motivated more new debt issuances than new equity issuances. However, the normalization of interest rates by the US Federal Reserve could reverse the scenario again, as debt servicing would become more expensive.