What they Mean for Public Utility Returns
Kurt Strunk is Vice President of National Economic Research Associates, Incorporated. Walter Hopkins is Senior Analyst of National Economic Research Associates, Incorporated.
In the week following the 2016 presidential election, bond yields rose substantially, signalling the potential reversal of a downward trend in yields that began nearly thirty years ago. Despite this initial move, uncertainty remains as to whether long-term yields will revert to historic averages.
Policy interventions by central banks may continue to suppress yields, leading to low or negative rates. The path of interest rates will affect how regulators view the fair level of return for investors who commit their capital to utilities that provide essential services to the public.
Steve Bannon, chief strategist for the Trump White House, signalled the administration's intent to take advantage of low borrowing costs. In a recent interview, he argues, "I'm the guy pushing a trillion-dollar infrastructure plan. With negative interest rates throughout the world, it's the greatest opportunity to rebuild everything."
With this view, it appears that the administration does not expect rates to rise significantly, despite the bond market's initial reaction to the Trump presidency. However, the fiscal spending anticipated by the new administration will naturally pressure rates upwards and may not be practicable without further central bank bond purchases and interest rate suppression. Those are actions Mr. Trump spoke out against as a candidate.