Duration Unveiled: Why Bonds Matter More in Utilities Than Tech
Understanding the hidden sensitivity of defensive sectors to rising rates
In a world obsessed with equity growth stories, its easy to forget that some stocks behave more like bonds than businesses. Nowhere is this more apparent than in long-duration sectors like Utilities and REITs — defensive corners of the market that tend to thrive on stability, yield, and cheap capital.
But what happens when interest rates rise?
While headlines often focus on tech selloffs or growth stock multiples compressing, the quiet pain in sectors like Utilities can be just as profound — and more structurally predictable. That’s because Utilities, despite being equity instruments, are long-duration assets in disguise.
What is Duration in Equities, Really?
In fixed income, duration measures a bond’s sensitivity to interest rate changes. The longer the duration, the more the bond’s price reacts to rate movements. Equity doesnt have a fixed maturity, but some sectors behave as if they do. The key lies in cash flow timing.
Sectors where earnings are stable but slow-growing — like Utilities — effectively deliver cash flows far into the future, similar to long-term bonds. Their present value is highly sensitive to changes in the discount rate. That’s what makes them duration-heavy.
By contrast, many Tech firms — especially profitable ones — deliver their cash flows earlier and faster. Others, especially speculative tech, may be sensitive to rates too, but for a different reason: valuation fragility, not bond-like structure.
The Cost of Capital Matters More for the Yielders
Utilities and REITs often trade as income vehicles. Investors buy them for yield. That yield competes directly with bond yields. So when rates rise:
- Their dividends look less attractive relative to Treasuries.
- Their borrowing costs rise, impacting regulated returns.
- Their valuations compress, due to higher discount rates.
This trifecta makes long-duration sectors especially rate-sensitive. But few models quantify this cleanly, and fewer investors account for it correctly.
A Sectoral Take on Duration Risk
Let’s break it down simply:
| Sector | Duration Sensitivity | Key Risk Driver |
|---|---|---|
| Utilities | High | Rate-driven yield spread |
| REITs | High | Cost of capital, refinancing risk |
| Consumer Staples | Moderate | Defensive, but less yield-reliant |
| Tech (profitable) | Low–Moderate | Growth resilience offsets sensitivity |
| Tech (speculative) | High, but volatile | Valuation collapse, not true duration |
This isn’t just a yield story. It’s a structural one.
The Bottom Line
When investors think about interest rate risk, they often look at growth stocks first. But duration lives in the quiet parts of your portfolio. Utilities, REITs, and yield-rich sectors may offer stability in downturns — but can silently underperform when bond yields spike.
Understanding duration through a sectoral lens is essential. It’s not just about companies. It’s about how entire industries absorb — or suffer from — shifts in monetary policy.
Because in some sectors, equity is just fixed income wearing equity’s clothes.