This week’s Barron’s had an article discussing how stocks have performed during periods of rising interest rates. (See article here) With utilities commonly thought of as a bond substitute, there was a bit of a discussion about the sector. The article put out the interesting statistic that over the past year on days when the 10-year Treasury yield rose, utility stocks fell a cumulative 24.4%. Utilities gained a cumulative 31.3% on days when the 10-year fell.
The article also contained a chart showing sector performance the last five times that the 10-year Treasury yield has increased over an extended period. While interest rates would obviously have an impact on utilities during these periods, it is also important to note other events that were occurring that had an even bigger impact on the sector’s performance.
The first rising rate period examined was October 1993 to November 1994. Utility stocks were down 23.2%, which was the worst performing sector during that period. One important thing to remember about the utility industry at that time was that the move to deregulation had just begun. It appeared that utilities would no longer have their monopoly status, and the risk inherent in these companies was about to rise. One of the big landmarks in the movement was the publication by the California PUC of the “Blue Book” in April 1994, that ordered the investigation into competition for the state. (That document can be found here.) The uncertainty created by these issues caused many investors to flee the space, and the price of utility stocks to drop.
The other period highlighted in the chart where industry issues at the time really need to be considered is from June 2003 to June 2006. During that period utilities were up 46.9% It is important to note that this is the time when utilities were finally escaping the after effects of the California Electricity crisis and the whole Enron debacle. Besides coming off of that low, this was also a period of rising natural gas prices, and these higher gas prices led to higher electricity prices, which led to some great stock performance for any company with significant merchant power exposure.
Below is a chart comparing the performance of the Philadelphia Utility Index (UTY) and 10-year Treasury rates.
Back in 2015 I wrote a Seeking Alpha article that looked at how utilities might perform if rates were to rise. There are many charts from that article that are still relevant to today. (You can find that Seeking Alpha article here.)