Colorado is posting the best returns among U.S. states this year in the $3.7 trillion municipal-bond market, bolstered by growing demand for BBB rated securities.
Debt from Colorado has earned 5.1 percent in 2012, the most among 26 states tracked by Standard & Poor’s and beating the broader market’s 4 percent gain. The performance is unusual for the Centennial State, whose annual returns have been no better than sixth-best since 2002 among U.S. states and territories, data compiled by Bloomberg show.
With local-government interest rates close to the lowest since the 1960s, investors are pushing into weaker credits for their higher yields. As a result, issuers selling tax-exempt bonds rated BBB, the lowest tier of investment grade, are paying the smallest penalty since 2009. Of the 10 issues with the biggest weightings in Colorado’s S&P index, five have grades in the BBB area or lower.
“The best-performing-quality tier to date is the BBB quality tier,” said Steve Czepiel, a portfolio manager in Philadelphia for the $242 million Delaware Tax-Free Colorado Fund. (VCTFX:US) “That’s helped Colorado perform better.”
Munis are off to their best annual start in three years as fixed-income assets have rallied on signs the U.S. economic rebound is cooling. Yet BBBs are doing even better.
The segment has earned 6.3 percent this year, to 2.5 percent for AAA bonds, Bank of America Merrill Lynch data show. Ten-year tax-exempt securities with a BBB grade yield about 3.25 percent, or about 1.31 percentage points more than top-grade debt, according to Bloomberg Fair Value data. The gap is the smallest since October 2009.
Colorado is also luring investors as its economy recovers from the 18-month U.S. recession that ended in 2009.
The state cut spending on education and other programs to close a combined $2.95 billion of gaps from 2010 through this year. Higher tax revenue allowed the state to hold per-pupil funding steady for primary schools for the first time since fiscal 2009, Governor John Hickenlooper, a first-term Democrat, said when he signed the budget this month.
“One of the main factors is the Colorado economy” in explaining the bonds’ performance, said Chris Drahn, who manages the $116 million Nuveen Colorado Municipal Bond Fund from Minneapolis. “People around the country like it, and are more comfortable with it compared to other states.”
Colorado outpaced 42 states last year, according to the Bloomberg Economic Evaluation of States. Its index of economic health rose 1.5 percent in the period, eighth-best.
At 7.8 percent in March, Colorado’s jobless rate was below the national average of 8.2 percent.
Colorado has a AA issuer rating from S&P, third-highest, though by state law it isn’t allowed to sell general-obligation bonds. The S&P index includes issuers ranging from agencies financing transit projects to school districts and Denver airport-revenue debt.
“The big drivers of Colorado debt are $100 million to $200 million deals in lower-quality bonds on projects that were done well,” said Ron Speaker, president of Equus Private Wealth Management in Carbondale, Colorado.
Equus, which focuses on Colorado tax-exempt bonds, bought debt last month in the health-care segment, including a five- year revenue bond with a 3 percent yield that will help fund a $120 million expansion at Aspen Valley Hospital.
Following are pending deals:
COLORADO HEALTH FACILITIES AUTHORITY plans to sell about $171 million in tax-exempt revenue bonds as soon as next week, according to an offering document. The proceeds will be used to refund debt on behalf of The Evangelical Lutheran Good Samaritan Society and finance capital projects. S&P rates the bonds A-, seventh-highest, with a negative outlook. Citigroup Inc. is the underwriter. (Added May 11)
METROPOLITAN ATLANTA RAPID TRANSIT AUTHORITY plans to sell about $327 million in refunding bonds as soon as next week, according to the offering document. The bonds will be backed by tax revenue. Moody’s rates the bonds Aa3, fourth-highest. The debt will be priced competitively. (Updated May 10)
To contact the reporter on this story: Jennifer Oldham in Denver at Joldham1@bloomberg.net
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