Utility stocks rocked higher Thursday, which might seem
strange in a supposedly bullish stock-market environment.
Four of the five stocks in IBD's utilities screen --NiSource (
),Dominion Resources (
),Sempra Energy (
) andOGE Energy (
) -- showed solid gains Thursday.
And the Dow Jones utility average was outperforming the
Nasdaq, the S&P 500 and small caps Thursday. What gives?
The kick-the-can solution in Washington to the debt-ceiling
issue might get indirect credit as Treasury yields slip, making
dividends more attractive. But the risk of a government default
on its debt or even delayed payments were never truly at
Less than 10% of tax receipts are needed to service the debt,
so paying the interest on bonds wouldn't have been a problem even
if the debt ceiling wasn't raised. Or as Moody's Steven Hess
wrote in a credit outlook: "The debt limit restricts government
expenditures to the amount of its incoming revenues; it does not
prohibit the government from servicing its debt. There is no
direct connection between the debt limit ... and a default."
Yet, the D.C. noise might have done utilities a favor. The
worry for months has been that the Federal Reserve will at some
point drop the bond buying and let interest rates rise.
Rising interest rates mean utility dividends look less
attractive. Higher rates also impose higher costs on utilities
because they are in a capital-intensive industry.
The recent bickering over the debt ceiling reminded the Street
of a very real pressure the Fed faces on interest rates.
Servicing the debt is a walk in the park with the current low
interest rates. If rates were to rise significantly, servicing
the debt could eat up a much bigger chunk of federal
The Fed doesn't want to face the political pressures that go
with that scenario.
Does this mean utility investors can breathe easier? Maybe,
but with so much of utilities' appeal dependent on what
government does or doesn't do, caution is appropriate.