Utility Stocks Lead Market On Thursday: What Gives?

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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 ( NI ),Dominion Resources ( D ),Sempra Energy ( SRE ) andOGE Energy ( OGE ) -- 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 stake.

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 spending.

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.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Personal Finance , Investing Ideas

Referenced Stocks: D , NI , OGE , SRE

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