Utility stocks trade inversely to Treasury yields
The ten-year Treasury yield fell and closed at 2.05% last week. Treasury yields and utilities usually trade inversely to each other. Utilities are sensitive to interest rates. The FOMC kept the interest rates unchanged on June 19. So far in 2019, the benchmark ten-year Treasury yields have fallen more than 20%. A probable rate cut could make utility stocks relatively more attractive.
The above chart shows utility stocks’ opposite movement compared to the ten-year Treasury yields.
Higher interest rates usually dent utilities due to their heavy capital expenditure needs. Utilities (XLU) usually carry a huge pile of debt on their books. Higher rates make utilities’ debt-servicing costs higher, which eventually hurts their profitability.
Utility stocks (VPU) (IDU) are typically seen as bond substitutes due to their steady dividend payments. Higher rates could make utilities relatively less attractive compared to bonds. So, we usually see investors selling utility stocks and turning to bonds in order to obtain higher yields when rates increase.