Steffen Ullmann
Senior Portfolio Manager – Investment Grade
Utility bonds have always been regarded as the epitome of defensive investments. However, this sector is increasingly exposed to a field of tension between regulation, politics and demand. At first glance, this development is hardly visible, but there is growing heterogeneity within the sector.
Utility bonds are seen by many as a low-risk investment. Stable demand and regulatory protection have historically allowed for generally high debt levels.
At first glance, the utilities sector remains robust compared to the market as a whole. However, a closer look reveals an increasingly heterogeneous picture within the sector. Figure 1 illustrates the sectoral dispersion of spread development since the start of the year: in the BBB area, the spread is over 70 basis points in some cases.
The background to this development is the growing tension between regulation, politics and demand to which the sector is increasingly exposed:
Regulation: Regulatory framework conditions make it difficult for companies to simultaneously reflect the higher interest rate environment and the growing investments required to achieve net zero targets.
Demand: The growing demand for energy due to electrification and the rapid development of AI applications is significantly increasing the pressure to invest.
Politics: Conflicting political objectives between security of supply, climate targets and price stability increase the influence of government decisions on the sector.
These structural tensions are reflected in the different spread developments. There are fundamental developments behind these figures. Some companies were nationalized, others proactively carried out capital increases in order to finance future investments with equity. Others had to strengthen their balance sheets due to Trump’s anti-renewable policy. In one extreme case, a British water supply company even defaulted.
Figure 1: Dispersion in utilities
Source: Bloomberg, EUR Non-Financial Corporate Index (LECFTREU Index); Bloomberg BClass Level 2 Utilities, only Senior Secured; classification according to BBG Composite Rating; period: 01.01.2025 to 07.10.2025; own presentation.
In view of the tensions described above, we expect spread dispersion to continue to increase in the future. Stock selection will therefore play a more important role, as an idiosyncratic development can ruin an allocation decision, no matter how well thought out. Stability can no longer be taken for granted. This also applies to the historically “defensive” sectors.
“A fundamental analysis is essential, even for supposedly defensive companies. The developments in the utilities sector illustrate this.”
– Steffen Ullmann
Risks
Price losses due to increases in yields and/or higher risk premiums are possible. A total loss cannot be ruled out either.
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