|There are several reasons for the interdependence between utility stock prices and interest rates. First, owing to their customarily high dividend yield, utility stocks are often treated as substitute for bonds, whose price fluctuations are almost totally dependent on interest rate changes. Second, most utilities have large amounts of debt in their capital structure, on which they must pay interest. The amounts of such payments are critical to their profitability. Third, the utilities are dependent on easy availability of funds in the capital markets to finance the expansion on which theyir long term profitability depends. Given this dependence of all stock valuation on interest rates, it is not surprising that utility stocks frequently change trend ahead of the general market.
Source: Stock Market Logic
by Norman G. Fosback
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