How fixed income investors view the utility sector.
Josh Olazabal is a vice president in the credit research group at PIMCO’s Newport Beach office. Previously he was a consultant with McKinsey & Co., and worked in corporate development at Duke Energy before that.
Utility management teams—and CFOs and treasurers, in particular—are making their feelings clearly and abundantly known about the current rate and funding environment. There’s been a recent rush to market in both the unsecured and first-mortgage bond markets—especially by electric utility operating companies (“opco”) looking to lock-in historically low rates and credit spreads. The market has been particularly receptive to higher quality deals at the regulated utilities, with investors looking for high quality yields and spread—i.e., the difference in yield and the risk-free rate of comparable maturity—in a market that continues to be characterized by Eurozone troubles, the fiscal cliff, and other uncertainties.
While the market has been an undeniable boon for utilities looking to reduce their costs of capital and term-out longer maturities at attractive rates, how do fixed income (FI) investors view the situation? Moreover, how do bond investors view the risk-and-reward picture at a time of historically low rates?
Here are some thoughts and observations “from the bond-side.”
Fixed-Income Perspective
First, there’s always a place for high-quality utility bonds in fixed income portfolios.