AI and Wildfires: Reassessing the Safe Haven Status of Electric Utility Bonds

The Changing Landscape of Electric Utility Bonds

Electric utility bonds have long been considered a safe haven for investors, particularly during economic downturns. However, recent developments in artificial intelligence (AI), cryptocurrency, and a series of high-profile wildfires have raised questions about the traditional perception of these investments 1

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Historical Context and New Growth Factors

Historically, electric utilities were viewed as stable but slow-growing investments. As Marty Fridson, founder of FridsonVision High Yield Strategy, recalls from his time at Morgan Stanley during the 1987 stock market crash, the advice was simple: "Buy utilities. Even when times are tough, people still have to pay their electric bills" 1

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However, the landscape has shifted. The tremendous energy demands of AI and cryptocurrency operations have lent a growth aura to the utility sector, potentially altering its risk profile 2

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Wildfire Risks and Financial Implications

Recent years have seen electric utilities face significant negative attention due to wildfires allegedly caused by storm-damaged power lines. Notable incidents include:

1. The August 2023 Maui wildfires, which caused Hawaiian Electric's 5.23% bond due 2045 to plummet by one-third 1

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2. California wildfires leading to massive lawsuits against Southern California Edison 2

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These events have introduced new risk factors for investors to consider when evaluating utility bonds.

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Risk Assessment in 2025

To gauge the current status of electric utility bonds as a safe haven, Fridson analyzed the risk premiums (spreads) of medium-quality (BBB) electric utility bonds in the ICE BofA US Corporate Index. The study compared individual utility spreads to their rating subcategory medians 1

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Key findings include:

1. As of February 28, 2025, BBB-rated electric utility bonds were evenly divided between high-risk and low-risk categories in a narrow spread environment.
2. In contrast, during high credit risk periods (e.g., September 30, 2022), electric utilities' bonds tended to have below-median spreads, indicating lower perceived risk 2

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Future Outlook

Despite the new challenges and growth factors, Fridson's analysis suggests that electric utility bonds may still serve as a defensive sector during economic downturns. If recession fears materialize, utility bond spreads are expected to increase more modestly compared to the overall corporate bond market 1

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While the sector has faced significant changes, electric utility bonds appear to maintain their relative stability in the face of economic uncertainty, albeit with new risk factors for investors to consider.