Utilities versus Treasury yields
Utility stocks generally trade inversely to Treasury yields. The ten-year Treasury yield fell from 2.37% to 2.33% last week. Weakness in Treasury yields is normally regarded as a positive sign for utilities.
The following chart shows how US utility stocks fared against ten-year Treasury yield in the past month.
Higher interest rates make utility stocks relatively unattractive in terms of dividend yields. Investors usually prefer Treasuries when interest rates are high.
Higher interest rates are expected to dent utilities given their heavy capital expenditure requirements. Utilities (XLU) (VPU) usually carry large amounts of debt on their books. Higher interest rates increase their debt-servicing costs, which ultimately impacts their profitability.
In the next part, we’ll look at utilities’ (IDU) chart indicators.