Bloomberg News

Yield Hunger Overcomes Risk as N.J. Cuts Bond Cost: Muni Credit

May 01, 2013

New Jersey, where Governor Chris Christie has lowered revenue forecasts, sold $350 million of general-obligation debt with investors starved for yield reducing the state’s borrowing cost to the cheapest in six years.

The state issued tax-exempt securities yesterday with a 10- year portion yielding 0.15 percentage point above benchmark municipal bonds, the smallest gap since 2007, data compiled by Bloomberg show. It was the first time since 2009 that New Jersey sold general obligations to finance new projects.

The reduced penalty shows the extra risks investors are taking as the Federal Reserve maintains monthly bond purchases to bolster the economy, pushing yields toward generational lows. New Jersey bucked the trend of the past eight quarters in the $3.7 trillion municipal market, where investors have shunned state general obligations in search of higher returns.

Investors are “in search of yield,” said Robert Amodeo, who manages $30 billion of munis, including $2 billion of New Jersey debt, at Western Asset Management in New York. “If there’s any spread left, people are trying to take that out.”

Revenue Risks

Christie, 50, who’s up for re-election in November, revised his revenue projection for this year to $31.3 billion, from $31.7 billion, as tax collections fell short. Standard & Poor’s, which has said he may not meet that lowered 2013 forecast, has had a negative outlook on the state since September. The governor forecasts a recovery to a record $32.8 billion for the fiscal year starting July 1.

Democratic lawmakers are skeptical about the revenue projections, and have refused to approve his proposed 10 percent tax cut until they have a clearer picture of collections for this fiscal year.

That didn’t stop New Jersey from selling the bonds at a premium, with Bank of America Merrill Lynch paying the state $399 million for the debt and the state obligated to repay $350 million, according to the state’s Treasury Department.

Bonds maturing in 10 years yielded 1.89 percent. Bank of America submitted the winning bid with a true interest cost of 2.737 percent, the lowest for New Jersey since 1976, according to William Quinn, a spokesman for the department.

Confidence Vote

“It’s a nice vote of confidence for New Jersey as a strong credit with a long history of responsible management,” Treasurer Andrew Sidamon-Eristoff said in an interview in Trenton.

A rally in Treasuries helped New Jersey cut its borrowing costs, said Gary Pollack, managing director with Deutsche Bank AG’s private-wealth unit in New York.

Ten-year Treasuries gained as the Fed said it will keep buying bonds at a pace of $85 billion a month and is prepared to raise or lower the level depending on economic conditions. The central bank has held its target for the federal funds rate near zero since December 2008. U.S. debt yields fell to the lowest level this year.

“It was a strong market to begin with,” Pollack said. “It’s some aggressive bidding by underwriters.”

The day before the sale, Pollack bought some New Jersey general obligations maturing in 2020 with a 1.6 percent yield. Similar-maturity bonds in yesterday’s sale priced to yield 1.34 percent.

Yield Advantage

New Jersey fared better in its offer than Connecticut, which sold 10-year general obligations in March at a yield spread of 0.2 percentage point. The states have the same Aa3 rating from Moody’s Investors Service, the fourth-highest level.

The New Jersey borrowing came six months after Hurricane Sandy struck Oct. 29, damaging seaside resort towns and railroads.

Proceeds will finance capital projects, according to bond documents. Standard & Poor’s and Moody’s give New Jersey a comparable grade, though the former assigns a negative outlook.

New Jersey had about $2.4 billion of general-obligation debt and $31.6 billion of bonds repaid with annual allocations from the state legislature as of June 30, according to its fiscal 2012 debt report.

While yields on top-rated municipals due in 10 years are near a three-month low at 1.74 percent, tax-exempt bonds are still cheaper than comparable-maturity Treasuries, which yield 1.63 percent.

The yield ratio between the two securities, a measure of relative value, is about 107 percent, above the five-year average of about 100 percent. The higher the percentage, the cheaper munis are relative to Treasuries.

To contact the reporters on this story: Michelle Kaske in New York at mkaske@bloomberg.net; Terrence Dopp in Trenton at tdopp@bloomberg.net

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


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