Build America Bonds Have Biggest Week in 6 Months as $3B Sold

Build America weekly issuance more than doubled to $3.34 billion, the most since December, as investor demand pushed yields on such debt to the lowest in almost two weeks.

The average yield of Build America Bonds fell almost 2 basis points to 5.89 percent on June 23, the lowest since June 11, according to a Wells Fargo index. Higher issuance also helped boost overall debt sales by states and municipalities to a six-week high of $8.9 billion, according to data compiled by Bloomberg. A basis point is 0.01 percentage point.

In the week ended Dec. 11, $3.98 billion of the taxable securities were sold, according to Bloomberg data. This week’s total is the fourth-highest since the program’s inception. The record week ended Aug. 21 with $4.22 billion of such obligations issued.

“Municipalities need the money, they need to borrow and Build America is an easy funding mechanism,” said Tom Boylen, a managing director and municipal-bond trader in Chicago for BMO Capital Markets. “The funding needs of this country are still extremely high. For investors, staying outside of cash is the only way you’re going to pick up any income.”

Yields on top-rated tax-exempts maturing in 2020 fell 1 basis point yesterday to 3.16 percent, the lowest in two weeks, according to Municipal Market Advisors, as buyers were more particular with their investments, Boylen said.

Ten-year government yields headed for a weekly decline of 8 basis points to 3.14 percent.

Yield Spread

The yield-spread between the average Build America Bond and the 30-year U.S. Treasury has widened 37 basis points to 178 basis points since May 6, according to Bloomberg data.

“There’s still an advantage to using BABs even though spreads have widened,” said Alan Schankel, head of fixed-income research at Janney Montgomery Scott LLC in Philadelphia.

The Bay Area Toll Authority, which is financing the new San Francisco-Oakland Bay Bridge, sold $1.5 billion of Build Americas yesterday, the biggest sale since March.

The $250 million in debt maturing in 2030 priced to yield 6.79 percent, 275 basis points above the benchmark 30-year Treasury for the deal. The $400 million due in 2040 was 287.5 basis points more than the benchmark, and the $850 million maturing in 2050 yielded 7.04 percent, 300 basis points above.

After the 35 percent interest rebate from the U.S. government, the bonds maturing in 2040 will cost the authority 4.5 percent, according to Bloomberg data. Top-rated 30-year debt yielded 4.55 percent yesterday, according to Concord- Massachusetts-based MMA.

A two-year extension of the Build America program is included in a Senate bill awaiting action. Passed by the House of Representatives May 28, the provision would cut federal subsidies to borrowers to 32 percent in 2011 and 30 percent in 2012.

Following are descriptions of pending sales of municipal debt in the U.S.:

MASSACHUSETTS WATER POLLUTION ABATEMENT TRUST, a state agency that provides low-cost loans for local water projects, will sell about $498 million of top-rated municipal bonds as soon as next week to refinance existing debt and fund water- treatment and drinking-water projects. The bulk of the sale will be $330 million of federally subsidized taxable Build Americas, with the remainder coming as tax-exempts. Underwriters led by Goldman Sachs Group Inc. will market the issue to investors. (Added June 24)

ILLINOIS, which is dealing with a deficit equal to half of its $25.9 billion budget, plans to sell $900 million in Build America Bonds as soon as next week. The state is rated fifth- highest at A1 by Moody’s and A+ by S&P. Citigroup Inc. will lead the marketing of the securities, which will be used for state transportation projects. (Added June 24)

JEFFERSON HEALTH SYSTEM, a nonprofit entity formed by three health-care service companies in Pennsylvania and New Jersey, plans to offer $355 million in tax-free municipal bonds as early as next week. The securities, rated by Moody’s at Aa3, fourth- highest, and AA by Fitch Ratings and S&P, third-highest, will be used to refinance current debt. The notes will be marketed by a group led by JPMorgan Chase & Co. and Citigroup. (Added June 24)

NEW YORK LIBERTY DEVELOPMENT CORP., a state arm created to finance loans for lower Manhattan construction, will sell $650 million in tax-exempt municipal bonds as soon as next week to refinance existing debt from the Bank of America Tower project at One Bryant Park. Bank of America Merrill Lynch and JPMorgan will underwrite the securities, which are top-rated by Fitch and Moody’s. (Added June 22)

To contact the reporters on this story: Allison Bennett in New York at abennett23@bloomberg.net; Justin Doom in New York at jdoom@bloomberg.net.

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