Bloomberg News

Utility Gauge Signals Treasury Yields to Rise: Chart of the Day

October 14, 2011

(GRAPHIC: COD_TREASURY_YIELD_101411. CHART OF THE DAY. Size: 2C X 4.25in. (96.0 mm X 107.95 mm) Expected by 15:00.)

Oct. 14 (Bloomberg) -- U.S. utility stocks are signaling Treasury yields will rise because the companies, which have high debt relative to other industries, are lagging behind broader share indexes, according to Pension Partners LLC.

The CHART OF THE DAY shows weekly performance for the 15- member Dow Jones Utility Average Total Return index and the benchmark industrial average of 30 companies. The lower screen tracks U.S. 30-year yields, which tumbled as the power and gas providers pulled ahead of the broader gauge in August and September.

The utility share index climbed in the third quarter while the main Dow average slid as investors bet borrowing costs would fall, said Michael A. Gayed, chief investment strategist at Pension Partners, a New York-based money management company. This month the opposite has happened: The broad market has outpaced the electricity and gas companies, foreshadowing debt-yield increases, he said.

“Utilities are lagging, and that means interest rates are expected to rise,” Gayed said. “Because these companies have high debt and generally stable revenue growth, the most important determinant of stock price is expectations for future interest rates. Utilities may be underperforming now because the cost of rolling over their debt is expected to increase.”

The utilities index has gained 0.3 percent this month, versus 5.2 percent for the overall Dow. That’s a shift from the third quarter, when the sector gauge advanced 1.1 percent, while the broader measure dropped 12 percent and Treasury yields tumbled to a 33-month low of 2.69 percent. Treasury 30-year rates will climb to about 3.50 percent by year-end, said Gayed, who predicted the July-August equities slide in a June article on the Seeking Alpha website.

The members of the utilities index, which include Consolidated Edison Inc. and NextEra Energy Inc., have debt that is equivalent to 35.07 percent of assets on average, according to data compiled by Bloomberg. For the broader Dow, the figure is 26.77 percent, the data show.

--Editors: Lee Miller, Rocky Swift

-0- Oct/14/2011 14:51 GMT

To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net

To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net


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