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How Higher Interest Rates Can Impact Utilities

Vineet Kulkarni - Author

Mar. 14 2017, Updated 7:38 a.m. ET

Utilities and interest rates

The near-zero interest rate environment has resulted in a low cost of debt, which motivated more new debt issuances than new equity issuances by utilities. However, the normalization of interest rates by the Federal Reserve could reverse this scenario again, as debt servicing could become more expensive.

Treasury yields (TLT) become more attractive when interest rates rise, making utilities (XLU) less competitive in terms of yields. For this reason, conservative investors tend to dump utility stocks (IDU) and load up on bonds when interest rates rise.

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