Reward/risk on a utilities short has increased. - A lot of yield has washed out of the curve over the past month, leaving less upside. Utilities are rate-sensitive because of their higher debt loads. - After December rate hike, there is just 16bps of tightening priced into the curve long-term and 23bps by the peak of this cycle, with the peak fed funds rate implied by Jan ’20. If the Fed goes further than that, that knocks down risk assets, with the most rate-sensitive the most vulnerable. - During rallies in stocks, utilities will likely underperform since the likelihood of rates-driven pops is now materially lower. Yet during further washouts, utilities will likely decline in conjunction. - Overall, currently at a stage in the cycle where risk assets are about fully priced. Cash yields around the most it’s going to for this cycle and the extra reward for buying equities is very poor relative to the extra risk. Meanwhile there is little likelihood that rates will materially decline while there will be pressure on credit going forward due a bond demand shortfall. +++ Risks - Utilities operating margins are relatively solid at about 16% - Further decline in rates (unlikely considering bond demand shortfall) - Negative carry through ~3% dividend + short the implied equity risk premium + borrowing costs, though offset to a degree through 2.2% carry on USD cash (2.4% by mid-Dec)