The Impact of Rising Long-Term Treasury Yields on Utility Sector Valuation

The utility sector’s valuation dynamics in 2023–2025 have been shaped by a complex interplay of rising long-term Treasury yields and evolving macroeconomic conditions. As interest rates climbed in response to inflationary pressures and Federal Reserve tightening, utilities—traditionally sensitive to discount rate changes—faced both headwinds and tailwinds. This analysis examines how shifting yield environments influenced risk-adjusted returns for the sector, drawing on recent data and market insights.

Treasury Yield Trends and Utility Sector Sensitivity

From 2023 to mid-2025, U.S. 10-year Treasury yields rose from near 3.5% to a peak of 4.58% in late 2024 before retreating to 4.23% by September 2025 [1]. The 30-year yield followed a similar trajectory, peaking at 4.86% in August 2025 [2]. These movements reflect the Fed’s aggressive rate hikes to combat inflation, which peaked at 9% in 2022, and subsequent cautious rate cuts as inflation moderated. Utilities, being capital-intensive and reliant on long-term debt, are particularly sensitive to such shifts. Higher yields increase borrowing costs, compressing profit margins, while lower yields reduce capital costs and enhance valuation metrics.

Valuation Metrics and Yield Correlations

The utility sector’s price-to-earnings (P/E) ratio has shown a nuanced relationship with Treasury yields. By March 2025, the median P/E for utilities stood at 22, 8% above its 20-year average, despite elevated 10-year yields [3]. This overvaluation was driven by robust demand from AI-powered data centers, which now account for 6–8% of U.S. electricity generation and are projected to rise to 15% by 2030 [4]. Meanwhile, the sector’s enterprise value-to-EBITDA (EV/EBITDA) multiple remained stable, supported by regulated earnings and infrastructure investments.

However, the inverse relationship between yields and utility valuations became evident during periods of rapid rate hikes. For instance, when the 10-year yield surged above 4.5% in late 2024, the S&P 500 Utilities Index underperformed the broader market, with its P/E ratio contracting by 12% year-to-date [5]. Conversely, the yield decline in 2025—driven by Fed rate cuts and economic slowdown—boosted utility valuations, with the index rising 9.2% in the first half of 2025 compared to the S&P 500’s 6.2% [6].

Risk-Adjusted Returns in a Shifting Yield Environment

The utility sector’s risk-adjusted returns have been bolstered by its defensive characteristics. Despite higher yields, utilities maintained a median dividend yield of 3.5% in 2025, outperforming the 4.25% yield of 10-year Treasuries [7]. This premium attracted income-focused investors seeking stable cash flows amid macroeconomic uncertainty. Additionally, utilities’ regulated nature insulated them from volatility in unregulated sectors, with the Morningstar US Utilities Index gaining 12% year-to-date through July 2025 [8].

Yet, challenges persist. The sector’s dividend yield discount to Treasury yields—the largest since 2008—signals potential for correction if yields rise again [9]. Moreover, capital expenditures for grid upgrades and renewable energy projects, projected to reach $36–$60 billion by 2030 [10], could strain balance sheets if borrowing costs remain elevated.

Conclusion

The utility sector’s valuation in 2023–2025 reflects a delicate balance between yield-driven headwinds and demand-driven tailwinds. While rising Treasury yields pressured P/E ratios and capital costs, strong fundamentals—including AI-driven electricity demand and regulatory support—offset some of these risks. For investors, the sector offers a compelling risk-adjusted return profile, particularly in a low-growth environment where defensive assets are prized. However, vigilance is required as yield volatility and fiscal pressures could reshape the landscape in 2026.

Source:
[1] 10-Year Treasury Yield Long-Term Perspective: August 2025 [https://www.advisorperspectives.com/dshort/updates/2025/09/02/10-year-treasury-yield-long-term-perspective-august-2025]
[2] 5 Year Treasury Rate - Real-Time & Historical Yield Trends [https://ycharts.com/indicators/5_year_treasury_rate]
[3] Utilities: Investors Seeking Safety; Interest Rate Cuts Could ... [https://www.morningstar.com/stocks/utilities-investors-seeking-safety-interest-rate-cuts-could-give-boost]
[4] 2025 Power and Utilities Industry Outlook [https://www.deloitte.com/us/en/insights/industry/power-and-utilities/power-and-utilities-industry-outlook.html]
[5] Utility Stock Performance In A Rising Interest Rate Environment [https://www.spglobal.com/market-intelligence/en/news-insights/research/utility-stock-performance-in-a-rising-interest-rate-environment]
[6] Utilities − U.S. Powering the Future Capital Investment Super-Cycle [https://gabelli.com/research/utilities-%E2%88%92-u-s-powering-the-future-capital-investment-super-cycle-eps-cagrs-to-rise/]
[7] The Rate-Cutting Playbook: Fixed Income in Focus [https://www.jpmorgan.com/insights/markets-and-economy/top-market-takeaways/tmt-the-rate-cutting-playbook-fixed-income-in-focus]
[8] US Utilities Market Trends for 2025 [https://www.morningstar.com/stocks/us-utilities-market-trends-2025]
[9] Utilities Sector Outlook: Key Themes in 2025 [https://www.morningstar.com/business/insights/blog/markets/utilities-sector-outlook]
[10] 2025 Power and Utilities Industry Outlook [https://www.deloitte.com/us/en/insights/industry/power-and-utilities/power-and-utilities-industry-outlook.html]