Texas Issuers Sell $1 Billion in Debt as Yields Plummet on Recession Risk

Texas issuers led by San Antonio’s Bexar County and Austin, the state capital, are set to borrow $990 million this week, almost three times more than last week, as taxable and tax-exempt yields plunge to record levels.

The risk of a renewed U.S. recession led investors to the perceived safety of Treasuries, pushing 10-year benchmark yields to a 19-month low this week. Top-rated tax-exempt municipal yields due in 10 years fell 2 basis points yesterday to 2.58 percent, the lowest ever, according to data from Concord, Massachusetts-based Municipal Market Advisors dating to January 2001. Bond prices move inversely to yields.

“Munis are shining right now, even at the lower rates,” to David Jaderlund, who works in fixed-income trading and sales for Hampstead Group in Dallas, an investment adviser who buys debt only from Texas issuers.

The state doesn’t charge income tax, so resident investors don’t benefit from the usual double-tax exemption on muni debt.

Yields on top-rated 10-year debt haven’t risen since June 15, according to MMA. With an increase in 10-year Treasury yields yesterday, the top-rated, 10-year municipal bonds yield ratio fell to 97 percent, the smallest in three weeks, according to data compiled by Bloomberg.

“It appears the market is telling you we’re entering into a disinflationary world at best, if not a deflationary world,” said R.J. Gallo, portfolio manager at Pittsburgh-based Federated Investors, which has $33 billion in municipal holdings.

This Week’s Sales

The Texas offerings follow the state’s sale of $7.8 billion in one-year notes on Aug. 24, its largest such issue in six years. This week’s total compares with $842 million from issuers in California and $796 million from Pennsylvania, Bloomberg data show. Texas issuers sold $339 million in bonds last week.

Top-rated Austin, the fourth-fastest growing metropolitan area according to the U.S. Census Bureau, is selling about $145 million through competitive sales today. The bulk of the issue will be tax-exempts, with about $26 million coming as taxables, preliminary offering documents show.

Bexar County’s hospital district is offering $193 million in federally subsidized Build America Bonds and $12 million in tax-exempts.

Houston Utilities

Houston, whose debt carried third-highest rankings from Moody’s Investors Service and Standard & Poor’s, sold $212 million in utility-revenue bonds Aug. 24, with eight-year obligations priced to yield 2.26 percent, 11 basis points above an MMA index of top-rated eight-year debt. A basis point is 0.01 percentage point.

“It’s a very attractive time for issuers to lock in some longer-term bonds,” said Regina Shafer, who manages $5.3 billion of tax-exempt municipal bonds as assistant vice president of fixed-income investments for USAA Investment Management Co. in San Antonio. “If you have debt to sell, why not do it now?”

Some investors are eschewing the municipal market in favor of corporate debt that’s perceived to be undervalued.

“The absolute yields are too low,” said Colby Harlow, who manages $150 million as president of Dallas-based hedge fund Harlow Capital Management. “I’m not going to loan out money at those rates.”

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

PENNSYLVANIA TURNPIKE COMMISSION, established in 1937 to help manage highways, plans to issue about $600 million in tax- exempt debt and taxable Build Americas as early as this week. The revenue bonds, rated fourth-highest by Moody’s at Aa3, will be used for capital-improvement projects. Bank of America Merrill Lynch will lead marketing of the notes. (Updated Aug. 23)

STATE OF NEW YORK MORTGAGE AGENCY, which provides low- interest fixed-rate mortgages and financial assistance to help low- and moderate-income families become homeowners, plans to issue about $152.9 million in tax-exempts as soon as next week to fund operations and refinance existing debt. The mortgage- revenue bonds, rated highest by Moody’s, at Aaa, will be marketed by a group led by Morgan Stanley. (Added Aug. 26)

To contact the reporters on this story: Brendan A. McGrail in New York at bmcgrail@bloomberg.net; Darrell Preston in Dallas at dpreston@bloomberg.net;

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