BLBG: Bond Supply Near 5-Year High as Build America Deadline Looms: Muni Credit
U.S. states and cities scheduled sales of $22.6 billion in debt this week, almost the highest level in five years, as issuers rushed to take advantage of the federally subsidized Build America Bond program before it ends.
The 30-day visible-supply index of new municipal issues climbed about $4.5 billion from last week, according to data compiled by Bloomberg. The index reached $26.3 billion on Nov. 16, the highest since February 2005. Sales on the calendar rose 86 percent from the same day last year, Bloomberg data show.
Of the $11.3 billion of debt states and local governments are selling this week, about $4.2 billion are taxable Build Americas, the third-most since August 2009, according to data compiled by Bloomberg. With such federally supported programs set to expire Dec. 31, supply is expected to increase, said Justin Hoogendoorn, a bond strategist at BMO Capital Markets in Chicago.
“It won’t be a normal year-end,” Hoogendoorn said. “There’s every incentive to come in and get funding.”
Since Nov. 1, the taxable securities have made up about 35 percent of total municipal issuance, compared with about 23 percent a week since the program began in April 2009, Bloomberg data show.
Thirty-year tax-exempts sold off from Oct. 25 through Nov. 18 when California cleared its sale of $10 billion in notes, with yields gaining about 77 basis points, or 0.77 percentage point, according to the Bloomberg Valuation index. Bond yields move inversely to price.
‘Hone the Volatility’
December won’t see the same kind of surge in yield even with a large supply because bonds that matured Dec. 1 will provide investors with cash to make more purchases, said Matt Dalton, chief executive officer at Belle Haven Investments Inc. in White Plains, New York, which has $450 million in municipal assets.
“The maturities have created a healthy cash supply at the end of the year that will soak up a lot of the maturities,” Dalton said. “The cash will help support the market and hone the volatility.”
Yields on 10-year tax-exempts slipped less than a basis point yesterday even as 10-year Treasury yields rose above 3 percent for the first time since July as U.S. home sales added to evidence of faster economic growth and the Federal Reserve bought more Treasuries.
The extra yield investors demand for Build Americas above 30-year Treasuries was 195 basis points yesterday, down a basis point from a three-month high on Nov. 30, according to the Wells Fargo index.
Build Americas
A bill pending in the Senate would extend the Build America Bond program through 2011 while paring the subsidy to 32 percent of the interest cost from 35 percent. Almost $173 billion of the taxable debt has been sold since the program began in April 2009 as part of the economic-stimulus package.
If extended, total 2011 municipal issuance would be about $395 billion, compared with $345 billion if the program ends, Alex Roever and Chris Holmes, strategists at JPMorgan Chase & Co., said in a research note Nov. 24.
The bill would reduce the advantage of issuing Build Americas instead of tax-exempt securities by shrinking the subsidy 3 percentage points, the analysts said. “A subsidy reduction of this magnitude, keeping other factors constant, would only modestly reduce the volume of BAB issuance from current levels,” they said.
Following are descriptions of pending sales of U.S. municipal debt:
NEW JERSEY TURNPIKE AUTHORITY, which runs the 122-mile (196-kilometer) New Jersey Turnpike and 173-mile Garden State Parkway, plans to sell $1.5 billion in taxable Build America Bonds as soon as next week to fund the capital improvement plan. The authority is rated A3 by Moody’s Investors Service, fourth- lowest investment grade, A by Fitch Ratings, fifth-lowest, and A+ by Standard & Poor’s, fifth-highest. Underwriters led by Goldman Sachs Group will market the debt to investors. (Added Dec. 3)
NEW YORK LIBERTY DEVELOPMENT CORP., a state arm created to finance loans for lower Manhattan construction, will sell $1.3 billion in tax-exempts as early as next week to refinance existing debt from the World Trade Center project, according to S&P, which assigned a rating of AA-, fourth-highest. The bonds are backed by support payments from the Port Authority of New York and New Jersey, which owns the site, and rent from New York City, S&P said in a Dec. 1 report. Goldman will lead banks marketing the bonds. (Added Dec. 3)
DISTRICT OF COLUMBIA, the U.S. capital city, plans to sell about $342 million in taxable Build Americas as soon as next week. The securities will be backed by a first lien on personal- income and business-franchise tax revenue, according to a Nov. 23 report by Fitch, which rates the debt AA+, its second-highest investment grade. Underwriters led by Citigroup will market the bonds. (Added Dec. 3)
To contact the reporters on this story: Brendan A. McGrail in New York at bmcgrail@bloomberg.net; Alexandra Harris in New York at aharris48@bloomberg.net.
To contact the editor responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net
