Bloomberg News

New York Boosts Tax-Backed Sale on Flight to Safety: Muni Credit

July 14, 2011

July 14 (Bloomberg) -- New York increased the size of a personal income tax-backed offer to $866 million, the largest and highest credit quality offer this week, and lowered yields as investors sought safety from a deteriorating federal outlook and instability in Europe.

“This is just a market that is very credit-quality conscious,” said John Hallacy, the head of municipal research at Bank of America Merrill Lynch. “They’re willing to accept a somewhat lower yield if they know they’re not going to have to lose sleep over what their holdings are.”

New York’s securities are benefiting from a flight to top- rated municipals, which tend to be less volatile in reacting to U.S. and international events, Hallacy said. Investors are avoiding bonds that may be affected by federal budget cuts or turmoil in Europe, where three European Union nations are now rated below investment grade.

The borrowing for the state university system was boosted 14 percent and yields cut by as much as 10 basis points from the initial placements with individuals for debt maturing in 2026 and 2031, the New York State Dormitory Authority said. A basis point is 0.01 percentage point.

“We had solid demand on the loan throughout the curve from a wide range of investors,” Dormitory Authority President Paul T. Williams said in an e-mail. “We saw very good interest from retail which helped to set the stage for a very successful institutional pricing.”

Bonds Rally

Top-rated tax-exempt bonds have rallied along with Treasuries in the past week, with yields on general obligations falling about 11 basis points since July 5, according to a Bloomberg Valuation index. Ten-year treasuries have fallen 24 basis points in the same period.

Federal Reserve Chairman Ben S. Bernanke told Congress yesterday the central bank was prepared to take additional action, including buying more government bonds, if the economy appears to be in danger of stalling. Moody’s Investors Service subsequently put the U.S. under review for a credit rating downgrade as talks to raise the government’s $14.3 trillion debt limit reached an impasse.

Ten-year municipal debt yields are at their highest relative to Treasuries since mid April, according to data compiled by Bloomberg.

New York Favored

Investors are favoring New York debt as the state corrals its spending and its economy improves -- personal income grew 4.1 percent last year, the second-best rate among U.S. states, according to a May 31 report by Fitch Ratings.

“New York’s program specifically is strong,” said Alan Schankel, director of fixed-income research at the financial services firm Janney Montgomery Scott LLC in Philadelphia, referring to the tax-backed bonds. “You get a first slice at income taxes, and I think it’s a very strong program and very strong coverage.”

Governor Andrew Cuomo and the Legislature approved an on- time budget for the fiscal year beginning April 1 that reduced total spending 2.6 percent, the first drop since at least 1995. The budget cut school aid by $1.3 billion, and capped Medicaid, the federal-state health-insurance program for the poor, at $15.3 billion.

The premium investors demand to hold an AAA rated personal income-tax bond issued in 2010 and due February 2020 over an index of top-rated general-obligation bonds of the same maturity has narrowed by 15 basis points since March 10, before Cuomo signed the budget, according to Bloomberg data. The bonds yielded 2.8 percent on July 11, the most recent trade.

New York’s bonds look secure because investors understand that people will pay their taxes, Hallacy said.

PIT Fatigue

“Last year there was some fatigue among muni buyers because there were so many PIT issues,” Matt Fabian, a managing director at Concord, Massachusetts-based Municipal Market Advisors, said in a telephone interview.

“This year, where there’s a lot less supply, the dynamic has reversed so the issuer is in a better position.”

Following is a description of a pending sale of U.S. municipal debt:

WASHINGTON STATE, the eleventh-largest issuer of municipal bonds last year, will offer a series of $742 million in tax- exempt and taxable debt beginning as soon as tomorrow for capital projects including university and transportation renovation. The bonds carry the second-highest investment grade from the three major credit rating firms. A portion of the deal will price competitively while JPMorgan Chase & Co. will underwrite the remaining bonds. (Added July 14)

--Editors: Walid El-Gabry, Pete Young

To contact the reporters on this story: Sarah Frier in New York at sfrier1@bloomberg.net; Michelle Kaske in New York at mkaske@bloomberg.net

To contact the editor responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net


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