Xcel Energy is cashing in on low yields for corporate bonds.
The Minneapolis-based electric and gas utility on Thursday issued $450 million in three-year bonds with an interest rate of just 0.75 percent, the lowest on record for the company’s borrowings, according to Bloomberg data.
It is the company’s second bond market record in the past year. When Xcel sold 10- and 30-year bonds last August at 2.15 percent and 3.4 percent, they were the lowest rates ever for any utility, said Paul Johnson, Xcel’s vice president of investor relations and business development.
The three-year bond issue is part of a broader refinancing effort that will save the company $30 million to $35 million this year on interest payments, Johnson said in an interview.
“Even though we are increasing the amount of debt, our total interest cost is going down,” said Johnson, who credited the company’s strong balance sheet for the favorable interest rates.
Xcel, like other utilities, borrows to finance transmission lines, power plants and other electrical and natural gas infrastructure. Johnson said Xcel is investing about $3 billion this year across its service areas in eight states.
Corporate bond interest rates, which are tied to Treasury rates, are at all-time lows not only for investment grade issues like Xcel’s, but also for junk bonds, which carry more risk, said Kent White, head of research for Thrivent Asset Management in Minneapolis.
A week ago, Apple Inc. three-year bonds were issued with a record-low interest rate of 0.45 percent.
What’s good news for Xcel and Apple is hard on investors who depend on fixed-income securities. Many of them are retirees seeking steady income.
“There is not a lot of yield out there,” said White. “It makes it very difficult to find something.”
White said interest rates even on junk bonds have dropped to record lows, dipping below 5 percent on a key benchmark this week. “There just isn’t a lot of return in fixed income without taking on a lot of risk,” White added.
In a sign of the times, famed investor Warren Buffett of Berkshire Hathaway recently disclosed that he’s stopped buying corporate bonds, and is selling them instead. “I feel sorry for people that have clung to fixed-dollar investments,” Buffett said at the Omaha-based fund’s recent annual meeting.
White said one reason three-year bonds like Xcel’s and Apple’s can be sold with such low interest rates is that demand remains strong for the shorter-term notes, which likely won’t drop as much in value if interest rates begin to rise.
Bloomberg News contributed to this report.