Signs are pointing toward a rise in long-term interest rates and this is a worrisome development for regulated electric utilities, AllianceBernstein said in a March 24 note to clients.
“The yield on the 10-year Treasury has increased sharply since the end of January 2015, rising from 1.64% to 1.91% as of Monday,” Bernstein said in the analysis led by Senior Analyst Hugh Wynne.
“Over the next twelve months, the 50 economists polled by Blue Chip Financial Forecasts expect long term interest rates to rise by ~100 basis points, with the yield on the 10-year U.S. Treasury expected to increase to 2.9% in the first quarter of next year,” according to Bernstein.
“If the consensus view is correct, we are in the second month of a period of rising long term interest rates similar to those in our sample,” according to Bernstein. “In these prior cycles, months two through five have been ones of dramatic underperformance by regulated utility stocks.”
Bernstein said that it looked at historical underperformance during similar periods of rapidly rising long-term interest rates since 1972. “We have identified 14 periods such periods, lasting 12 months on average, over the last four decades,” Bernstein said.
“During the 14 periods of rapid increases in 10-year U.S. Treasury yields since 1972, regulated utilities underperformed the S&P 500 by an average of 16.0 p.p. on annualized basis, with an information ratio of – 1.1,” Bernstein said.
The underperformance of the regulated utilities was particularly marked during the first five months of the 14 periods analyzed, Bernstein said.
Bernstein Research and Sanford C. Bernstein are affiliates of AllianceBernstein, a global asset management firm.