Once the Fed eventually hikes interest rates, the higher rates will make fixed-income instruments more attractive on a relative basis, and bond-like equities, like utilities, less enticing. Consequently, utilities may remain flat or underperform other segments of the equities market once rates start ticking higher.
“The US 10-year Treasury yield closed at an all-time low of 1.375 percent on Tuesday, and the 30-year yield hit a fresh record low of 2.098 percent on Wednesday morning. Uncertainty following the UK’s decision to leave the European Union may be one factor driving bond yields lower, but stimulative central bank policies amid stagnant global growth and moribund inflation are the primary catalyst for ultra-low rates,” reports CNBC.
Even frothy valuations on utilities are not deterring investors.
Goldman Sachs notes “that regulated utilities now trade at a forward price-to-earnings ratio in excess of the S&P 500 based on estimated 2017 and 2018 earnings. That ratio is also elevated relative to the sector’s five-year average,” reports Bloomberg.