Bloomberg News

Single-Family Best With Highest Return-Lowest Risk: Muni Credit

March 06, 2013

The U.S. housing rebound is making local debt backed by home-mortgage payments the safest place for municipal investors facing the prospects of tax changes and higher interest rates.

Since the 18-month recession ended in 2009, bonds sold by state housing agencies from California to Florida to finance single-family mortgages have delivered the best returns in the $3.7 trillion municipal market after adjusting for volatility.

Home prices rose the most in six years in December. For investors betting that a strengthening economy will push yields higher this year or that Congress will reduce munis’ tax- exemption to shrink the federal deficit, housing-related local debt is proving a haven, according to data compiled by Bank of America Merrill Lynch and Bloomberg.

“The recovery story in the housing market in general is doing a lot to drive” risk-adjusted returns for the debt, said John Hallacy, head of muni research at Bank of America in New York. “There’s a sense that we’ve recovered a lot of ground, and if anything, people working in the housing industry would like to see more supply.”

California Leads

Led by issuers such as the California Housing Finance Agency and Florida’s Housing Finance Corp., localities have about $66 billion of single-family munis outstanding, Bloomberg data show. Such bonds have earned about 21 percent when adjusted for price volatility since July 1, 2009, beating the 13 percent gain for the broader muni market, the data show. Treasuries have earned 4.3 percent by that measure.

Housing-finance agencies sell bonds to fund low-interest mortgages for first-time buyers earning less than the local median income. They have helped more than 2.6 million families buy homes, according to the Washington-based National Council of State Housing Agencies.

The home market is gaining momentum more than three years after the longest recession since the 1930s.

Purchases of new homes jumped in January by the most in two decades. Home prices in 20 U.S. cities rose 6.8 percent in the 12 months through December, the biggest annual gain since 2006, according to the S&P/Case-Shiller index.

Yield Cushion

The housing securities will probably extend their performance as their higher relative yields will help shield investors from any increase in interest rates, said Michael Brilley, president of fixed income at Sit Investment Associates in Minneapolis.

Many investors anticipate interest rates will climb later this year or in early 2014. Yields on 30-year Treasuries will rise by about 0.4 percentage point to 3.53 percent in the second quarter of 2014, according to the median response of 48 analysts in a Bloomberg survey.

“If interest rates go up, they will not be as hard hit by price depreciation as other bonds,” Brilley, who helps manage $3 billion of munis, said in an interview.

“As interest rates have come down and may now start going sideways to up, we’d rather own bonds like this that are more stable in price,” Brilley said. His firm directs 17 percent of its muni portfolio to single-family housing bonds.

Prepay Risk

Single-family munis tend to yield more than other local debt because investors want compensation for the risk that issuers may prepay the bonds as homeowners refinance or sell, said Blake Miller, portfolio manager at New York-based Neuberger Berman Group LLC. The company oversees about $11 billion in local debt, including single-family munis.

The Georgia Housing & Finance Authority sold $149.4 million of tax-exempt single-family housing bonds last month rated AAA, Standard & Poor’s top grade, Bloomberg data show. Debt due in 2043, the longest maturity, priced to yield about 3.9 percent, or about 0.9 percentage point above benchmark munis.

While investors favor the securities, agencies are issuing less because borrowers are turning to banks or other financing sources as mortgage rates are close to the lowest in at least 40 years. The average rate for a 30-year fixed mortgage was 3.51 percent in the week ending Feb. 28, near a record low of 3.31 percent set in November, according to Freddie Mac data.

Sales Drop

Local housing authorities sold $4.9 billion of munis to finance single-family mortgages in 2012, the least since 1995, Bloomberg data show.

“Housing finance agencies have not been able to issue bonds at rates that allow them to originate loans that are competitive with conventional mortgage rates,” Moody’s Investors Service analysts led by Rachael Royal McDonald wrote in a September report. “As a result, HFA single-family issuance has been declining significantly.”

Housing agencies have sold $763.4 million of single-family revenue bonds this year as of March 5, data compiled by Bloomberg show. The Massachusetts Housing Finance Agency plans to offer $320 million of such debt this month, Bloomberg data show.

In trading yesterday, yields on tax-exempt benchmark debt due in 30 years rose to about 2.98 percent, close to the highest since September, Bloomberg Valuation data show.

Following is a pending sale:

NEW YORK CITY MUNICIPAL WATER FINANCE AUTHORITY plans to sell $517 million of tax-exempt revenue bonds as soon as next week. Proceeds will refinance debt, according to the authority. (Added March 6)

To contact the reporter on this story: Michelle Kaske in New York at mkaske@bloomberg.net

To contact the editor responsible for this story: Stephen Merelman at smerelman@bloomberg.net


Cash Is for Losers
LIMITED-TIME OFFER SUBSCRIBE NOW
 
blog comments powered by Disqus