Bloomberg News

Tax-Free Bonds Poised to Recover as Borrowing Slows: Muni Credit

October 17, 2011

Oct. 17 (Bloomberg) -- The $2.9 trillion municipal-debt market may be set for a rebound from the worst start to a month since January as rising borrowing costs threaten to slow sales after the busiest stretch of the year.

California leads issuers offering a combined $7 billion of bonds this week, according to data compiled by Bloomberg. Borrowing has totaled $16 billion since Oct. 3, the biggest two weeks since December. The wave has contributed to a 0.99 percent loss on munis this month, the steepest since a 2.53 percent decline to start January, according to a Bank of America Merrill Lynch index tracking prices and interest income.

Sales may be tapering off after 10-year yields reached a two-month high last week. For the next 30 days, $9.1 billion of offerings are scheduled, the least since Sept. 12, according to data compiled by Bloomberg.

“Any decrease would be helpful just because that is the overriding concern right now as to whether issuance gets too big,” said Daniel Solender, who manages $14 billion as head of municipal bonds at Lord Abbett & Co. in Jersey City, New Jersey, in an interview. “There seems like there should be sufficient demand right now.”

As municipalities from Tennessee to Washington state borrowed, yields on top-rated 10-year tax-exempt bonds reached 2.58 percent last week, the highest since Aug. 3, according to a Bloomberg Valuation Index. The yield touched 1.995 percent on Sept. 26, the lowest since the index began in January 2009.

October Adjustment

“Usually when you adjust a lot -- 50 basis points in the 10-year part of the curve is a lot -- and when you adjust it and do it in a relatively short period of time, frequently it will draw in interest,” Chris Mier, a managing director at Loop Capital Markets LLC in Chicago, said in a telephone interview. A basis point is 0.01 percentage point.

While municipal yields are at a two-month high, they’re still below the levels of January. The 10-year tax-free benchmark yield is down from the 2011 high of 3.51 percent on Jan. 18 and below the average of 2.87 percent since the index began. State and local debt has returned 7.81 percent this year as of Oct. 13, outpacing Treasuries’ performance of 7.77 percent, according to Bank of America Merrill Lynch index data.

“There’s no doubt in my mind that munis will perform very well” this week with a drop in issuance, Justin Hoogendoorn, managing director in the strategic analytic group at BMO Capital Markets in Chicago, said in an interview.

Municipal yields have declined since the start of the year along with U.S. government rates on growing signs the economic recovery is losing strength and on the Federal Reserve’s plan to buy long-term Treasuries to support the economy. The jobless rate has remained stuck at 9.1 percent for the past three months. Investors fleeing sinking stocks bought bonds. The Standard & Poor’s 500 Index is down 2.6 percent this year.

Subway Extension

The lower interest rates are drawing in issuers from Honolulu to Chicago and helping this week’s second-biggest seller, Hudson Yards Infrastructure Corp., as it borrows $1 billion to extend the No. 7 subway line to Manhattan’s west side.

In the week’s biggest sale, California will offer $2 billion of general-obligation bonds to finance projects such as prisons and schools, and to refund debt.

Municipal securities have already started to rebound relative to Treasuries as European leaders’ efforts to resolve the sovereign-debt crisis damped demand for the safest assets. Yields on local-government securities due in 30 years were 114 percent of those on 30-year U.S. Treasuries last week, down from a two-year high of 130 percent reached Oct. 3, Bloomberg data show.

Following are descriptions of coming municipal sales:

VIRGINIA COLLEGE BUILDING AUTHORITY plans to sell $156 million of revenue bonds on Oct. 18 through competitive bids. The bonds will finance capital projects on six campuses. Fitch Ratings grades the bonds AA+, its second-highest rank. (Added Oct. 14)

The DISTRICT OF COLUMBIA will sell $104 million of revenue bonds as soon as this week to finance a new headquarters for the Association of American Medical Colleges. Bank of America Merrill Lynch will lead the sale. The bonds are rated A+ by S&P, the fifth-highest grade. (Added Oct. 14)

CHARLOTTE, North Carolina, whose airport served nearly 20 million passengers last fiscal year, plans to sell about $169 million of airport-related revenue bonds as soon as this week, according to preliminary offering statements. Bank of America Merrill Lynch will lead the sale. A $109 million portion of the sale, part of which is tax-free and part of which is subject to the alternative minimum tax, is rated Aa3, Moody’s fourth- highest grade. (Added Oct. 17)

NEW HAMPSHIRE will sell $100 million of general-obligation capital-improvement bonds as soon as this week through competitive bid, according to a preliminary offering statement. The state is rated AA by Standard & Poor’s, its third-highest grade. (Added Oct. 17)

--Editors: Mark Tannenbaum, Mark Schoifet

To contact the reporters on this story: Andrea Riquier in New York at ariquier@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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