State and local governments sold $4.4 billion of debt last week, the least since December, according to data compiled by Bloomberg. Yields on most tax-exempt maturities rose the past two weeks, with the 10-year touching an almost nine-month high, according to Municipal Market Advisors. Rates on taxable Build America Bonds climbed the past three weeks and are close to the highest in two months.
Build America debt, created last year as part of the federal economic stimulus package, accounted for $26 billion of the $97 billion of municipal sales in the last three months, according to Bloomberg data. Issuers of the debt get a 35 percent subsidy toward interest costs.
“The demand on the taxable side is extremely large,” said Christopher Mier, a municipal strategist at Chicago-based Loop Capital Markets. “You’re drawing in every type of taxable buyer, including foreign financial institutions.”
International investors bought 30 percent of California’s $3.4 billion taxable sale in March. Foreign buyers boosted their U.S. municipal holdings by about 50 percent, to $60.6 billion, in 2009, according to Federal Reserve data.
The average yield on the Wells Fargo Build America Bond Index was about 6.31 percent on April 2, 1 basis point below a two-month high of 6.32 percent set March 25. A basis point is 0.01 percentage point. Top-rated, 10-year tax-exempt securities yielded 3.23 percent, the highest since July, according to a daily survey by Concord, Massachusetts-based MMA.
‘Timing Is Good’
Illinois will offer $356 million in taxable debt this week, including Build America Bonds. The securities are part of $1.056 billion of debt that will help rebuild transportation and school infrastructure, said John Sinsheimer, Illinois director of capital markets, in an interview.
“We think the timing is good,” Sinsheimer said. “The market is understanding the Build America Bonds; they’re attractive to foreign investors.”
This week’s issuance calendar, which will include $4.2 billion in tax-exempt bonds and $895.6 million in taxable debt, still ranks among the three slowest this year. Diminished supply will help buoy the muni market, said Alan Schankel, a managing director at Janney Montgomery Scott LLC in Philadelphia.
“There’s going to be some decent demand and not much supply, and you could start to see muni yields outperforming” Treasuries, he said.
Reduced Supply
Ten-year municipal debt yields about 83 percent of equivalent-maturity Treasuries as of last week, up from this year’s low of about 79 percent, touched in January, according to Bloomberg data. Municipal yields have dropped in part as issuers turned to Build America Bonds, reducing tax-exempt supply. The government subsidizes part of the interest if states and local governments use the taxable bonds for public works.
Fitch Ratings will begin to shift its municipal grading scale today to make the ratings more comparable with corporate debt. State and local general obligations rated A to BBB- will be adjusted two levels higher and those rated A+ or more will be raised one level, the company said last week. Moody’s will begin doing so later this month.
“People that won’t buy anything rated below A are going to have more choices,” Schankel said. “This will help munis and perhaps lower overall yields a little bit, even though it’s not technically a credit improvement.”
Philadelphia, the lowest-ranked city among the 10 most- populous in the U.S., will offer $391.3 million in tax-exempt revenue bonds. The issue will be used to refund prior debt owed by the city’s water department.
Following are descriptions of pending sales of municipal debt in the U.S.:
THE CONVENTION CENTER AUTHORITY OF NASHVILLE AND DAVIDSON COUNTY plans to sell $633.3 million in bonds this month to help fund a new convention center in the capital city. The securities will be backed by tourism tax revenue. The issues will mature from 2019 through 2043. Goldman Sachs Group Inc. will market the sale. The bonds are rated Aa3 by Moody’s, A+ by Fitch and A by S&P, the fourth- and sixth-highest investment grades, respectively. (Added April 5)
MASSACHUSETTS DEPARTMENT OF TRANSPORTATION, created last year in a merger of state agencies, plans to sell $592.3 million of variable-rate demand obligations as soon as this week to match an interest-rate swap tied to its debt, according to a preliminary official statement. It sold $261.2 million of fixed- rate securities to lower its borrowing costs this week. The bonds were originally sold in 1997 and 1999 by the Massachusetts Turnpike Authority to finance Boston’s $14.9 billion “Big Dig,” the largest public works project in U.S. history. The subordinated bonds are secured by turnpike tolls and other revenue, such as state aid, and were rated AA-, fourth-highest, by Fitch on March 16. (Updated April 5)
