(Bloomberg News circulated the following article by Walden Siew on July 16.)
NEW YORK — Union Pacific Corp., Burlington Northern Santa Fe Corp. and other railroad company bonds are rallying compared with government debt as fuel surcharges shield them from rising energy prices.
The extra yield, or spread, above Treasuries investors require to hold notes of Union Pacific and Burlington Northern narrowed as much as 5 basis points since April. The spread for investment-grade bonds widened as much as 6 basis points to an average of 93, according to indexes prepared by Merrill Lynch & Co. that track the performance of the U.S. bond market.
Railroads are unusual because the government allows them to raise fees to cover extra fuel costs.
Their energy bill totaled $6 billion last year, double the amount from 2002. A May survey by the Philadelphia Federal Reserve showed manufacturers’ costs rose the most in 30 years while the prices they charged fell.
“You want to be in an industry that’s maintained pricing power,” said Jim Keegan, who has added railroad bonds to the $19 billion he oversees as a senior vice president at American Century Investments in Mountain View, Calif.
Fuel surcharges put in place by rail companies are at least $900 million more than increases in fuel costs, according to Thomas Schick, senior director of distribution for the American Chemistry Council, whose members include Dow Chemical Co.
The yield spread on Omaha, Neb.-based Union Pacific’s $250 million of 5.375 percent notes due 2014 narrowed about 5 basis points to 71 since April. The price of the bonds issued by the biggest U.S. railroad fell to about 97 cents on the dollar from 98.2 cents, boosting the yield to 5.9 percent from 5.7 percent, according Trace, the NASD’s bond-price reporting system.