Student Question of the Week: Interest Rate Sensitive Industries

Student Question from Grace R.
Course: Investment Planning

Student Question:

Hi Dan!

In the fundamental equity analysis discussion regarding sectors, it states that the Utilities sector is considered interest rate sensitive. Would you mind explaining how utilities are interest rate sensitive?

Instructor Response:

Hi Grace!

Great to hear from you!  And a very good question here.  The reason utilities are considered interest rate sensitive is because as providers of services like power and water, they have incredibly high infrastructure costs.  And most exclusively, in fact, that infrastructure is financed with bonds and other types of debt.  So for these companies, changes in interest rates can have a significant impact due to their high debt load.  As you would expect, utilities tend to do well in periods of low interest rates and not as well in periods of high interest rates.

I hope that helps answer this for you.  Let me know if I can provide any additional information.