Utility Stock Rally Signals Likely Stabilization Of Interest Rates Index Up 5.9 Percent In Eight Days

U.S. utility stocks staged their biggest advance since early June 1995, suggesting that yields on Treasury bonds have peaked for now, analysts said.

During the past eight days, the Dow Jones Utilities Average, made up of 15 electric and natural gas companies, jumped as much as 5.9 percent, the most in 13 months. A related Standard & Poor’s index of 26 electric companies spurted 6 percent in the same period.

Utility stocks’ gains are reassuring investors that Federal Reserve policy-makers won’t raise interest rates when they meet next week, and that yields on the benchmark 30-year Treasury bond won’t soon surpass the 7.19 percent reached two weeks ago. Yields tumbled to 6.89 percent Friday.

That’s good news for consumers. Homebuyers shopping for a mortgage, car buyers kicking tires on a new set of wheels and consumers laboring under credit-card debt will all benefit if rates stabilize or head lower.

“Utilities move with the bonds,” said Linda Duessel, a money manager at Federated Investors in Pittsburgh, which oversees $2 billion in assets devoted to utilities. “We’re starting to get more signals that maybe (the Fed) won’t be raising rates at the next meeting.”

Utilities move in tandem with Treasury bonds for a number of reasons: Their dividends grow more attractive as bond yields fall; state regulators base the companies’ rate of return on Treasury yields; and the companies’ high-cost plants and equipment are easier to finance when rates fall and more expensive when rates rise.

Duessel said utilities are gaining because investors concerned about lofty U.S. stock market prices are seeking safety in shares that pay high dividends and historically fall less when markets slide.

“You have possibly one of the more expensive markets that we’ve ever had,” with the difference between high yields on utilities and low yields elsewhere at records, Duessel said. “Utilities look undervalued. If anybody is thinking (stocks) may be due for a correction, they may want to be defensive and may want to hide somewhere.”

Of course, the reverse is also true. If rates come down, stocks as a whole may do better. When utilities and Treasury bonds all gain, “that’s comforting for supporting the case that long-term interest rates have peaked; that the major threat to the stock market has passed for now,” said Clare Zempel, chief investment strategist at Robert W. Baird & Co. in Milwaukee.

Relief for utility investors can’t come too soon. Burdened by concern about the effect of deregulation on many companies’ earnings and questions over whether dividends might be cut, the Dow Jones Utilities Average peaked almost three years ago. The average is down 15 percent from that level.

Across the same span of time, the Dow Jones Industrial Average soared 58 percent and the S&P 500 Index jumped 45 percent.

For that reason, some analysts are skeptical that utilities are a good place to park money.

“We’re getting strength (in utilities) because people have become more sanguine about interest rates the past few weeks, but it’s a terrible-looking chart,” said Philip Roth, a technical analyst at Dean Witter Reynolds. “The average is well below its 1995 high and that’s well below its 1993 high.”

The best-performing utility stocks today include Peco Energy Inc., parent of Philadelphia Electric; Public Service Enterprise Group Inc.; Duke Power Co.; American Electric Power Co.; DTE Energy Co., parent of Detroit Edison; and Dominion Resources Inc.