Bloomberg News

Bond Issuance Declines on U.S. Debt-Talk Volatility: Muni Credit

July 22, 2011

July 22 (Bloomberg) -- Municipal-bond issuance scheduled for the next 30 days is declining to the least in two weeks as U.S. debt-ceiling negotiations approach a deadline.

“Underwriters likely are wanting to avoid extreme volatility” caused by the ongoing discussions, said Ashton Goodfield, who oversees $26 billion in Boston as head of municipal-bond trading at DWS Investments.

Issuers brought almost $9 billion to market this week, the biggest amount this year, according to data compiled by Bloomberg. That’s set to shrink in the next month to about $5.8 billion, the lowest daily gauge since the first week of July, according to Bloomberg’s index of 30-day visible supply.

States and municipalities may have their ratings cut in August regardless of whether the U.S. government reaches a plan to reduce its deficit by the Aug. 2 deadline, Standard & Poor’s said yesterday. S&P outlined three ways it expects the U.S. to resolve the stalemate over its $14.3 trillion debt limit, two of which involve lowering the U.S. credit rating, which would affect top-rated muni issuers backed by federal funding.

If the U.S. government is at its most proactive, raising its debt ceiling, coming up with a plan to reduce debt and retaining its AAA credit rating, “it could prove to be problematic for public finance issuers because any deal would almost inevitably reduce federal outlays that affect their operations,” said the report by Steve Murphy, managing director of U.S. public finance. “Any issue that moved in lockstep with the sovereign rating could still retain its negative outlook.”

Closing Deficits

States and local governments, which avoided taking on debt earlier this year as they enacted plans to close deficits, returned to market with more than $8.5 billion in sales this week, according to data compiled by Bloomberg. That compares with about $4 billion a week in the first half of 2011, the lowest rate of sales since at least 2003.

Yields on 10-year top-rated tax-exempt municipal bonds were at 2.66 percent yesterday, close to the year’s 2.56 percent low on June 9, according to data compiled by Bloomberg.

“This was a really good time to come to market,” said Tom Doe, chief executive officer and founder of Concord, Massachusetts-based Municipal Market Advisors. “I would expect the market to be flat with maybe a weaker bias as we move through August,” in line with seasonal trends.

Reinvestment Declines

Bondholders had as much as $40 billion in coupon and interest payments to reinvest as their holdings matured at the start of this month, Chris Mauro, head of U.S. municipal strategy at RBC Capital Markets, has said. The amount of reinvestment money tails off in August, and demand will drop with it, said Fred Yosca, head of fixed-income trading at BNY Mellon Capital Markets LLC in New York.

“It’s hard to build a case for the market doing better here,” he said.

Democrats and Republicans have yet to agree on raising the government’s debt limit with the deadline looming. Without the ability to borrow, the government would have to cut about $134 billion of spending during August, according to a report by the Washington-based Bipartisan Policy Center.

More than 8 percent of the market value of securities in benchmark municipal indices are backed by U.S. government bonds, said J.R. Rieger, vice president of fixed income indices at S&P, in a research note.

“If a debt ceiling resolution isn’t in place soon we could see municipal bond yields rise, particularly on this segment of the municipal-bond market backed directly by U.S. government bonds,” he said.

Five States

Five of the 15 states with top bond ratings may have them cut should U.S. debt-ceiling talks fail, because of their dependence on federal revenue, Moody’s Investors Service said this week. Maryland, South Carolina, New Mexico, Tennessee and Virginia are under review, Moody’s said.

Maryland, which leads next week’s issuance calendar with $718 million, postponed the start of sales to individuals for some of its bonds, according to data compiled by Bloomberg. The sales, which were scheduled to begin today, will now start July 25.

Some states have acted ahead of possible market disruption if the U.S. fails to raise the debt ceiling. California will seek bids for a $5 billion bridge loan by July 26, Treasurer Bill Lockyer said yesterday. Proceeds would be used to help pay bills until the state can sell an estimated $5 billion of so- called revenue-anticipation notes, or RANs, scheduled for late August.

--Editors: Walid El-Gabry, Mark Tannenbaum

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

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


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