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Anyone trading utilities stocks?


muscleman
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Seems like mostly a bet on interest rates to me.  Pension funds have been piling into utilities since 2012 to replace low yielding bonds.  I was smart enough to buy a basket of utilities in 2012, but not smart enough to stick around this long.

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Seems like mostly a bet on interest rates to me.  Pension funds have been piling into utilities since 2012 to replace low yielding bonds.  I was smart enough to buy a basket of utilities in 2012, but not smart enough to stick around this long.

 

I thought when rates go up, people sell utility stocks to buy more bonds? But now I am seeing REITs and Utilities double from 1 year ago and did much better than other sectors.

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I think there are two levels of potential interest rate sensitivity.  The first is the CAPM based effect where higher yields of bonds will make utilities less desireable.  I'm guessing that since most pension funds are still promising high rates of return (7%) most bonds don't yield enough yet to compete with utility stocks.  This is completely a guess. 

 

The second source of interest rate risk is the regulatory lag associated with regulated utilities.  Unregulated utilities will generally outperform regulated utilities in a rising rate environment.  Other factors are still important such as how quickly interest rates rise and how frequently the particular utility is allowed to file for rate cases.

 

I don't have a good answer for why utility stocks have traded so strongly up to this point.

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Investor-owned utilities will tend to "behave" as a bond-proxy in the short term but will tend to "behave" like equity in the long term.

 

Also, in 2018, in some circles, there was an appetite for "defensive" stocks and securities potentially having uncorrelated returns.

 

In the last few years, despite risk-free rates going (and staying) down, the regulators have tended to adjust their CAPM models and there has been stickiness with the historical 10% ROE number while the cost of debt has remained low in the context of high leverage and thin (and thinner) spreads.

 

In december 2015, WEC energy issued 30-yr bonds (yield 4.3%) when the 10-yr RF rate was at 2.19%. Last October, WEC issued another round of 30-yr bonds (yield 4.3%) when the 10-yr RF rate was 3.15%.

 

The utilities model now rests on low debt costs, high valuations, "adjusted" rates of return and high expectations. Reversing some of those variables may increase the degree of correlation with other asset classes. In 2018, an analyst described WEC and others as too big to fail.

 

If you compare the share price "charts" of WEC and AWR, you will find that the curves tend to superimpose. Does that mean anything?

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