New York Mortgage Agency Borrowing Costs Fall 30% as Bonds Catch on `Fire'

State of New York Mortgage Agency, which provides subsidized home loans to low- and moderate-income families, cut its borrowing costs 31 percent since April on about $133 million in tax-exempt housing bonds as demand from individual investors helped drive down yields.

Top-rated tax-exempt municipal yields on debt due in 10 years fell 1 basis point, or 0.01 percentage point, yesterday to 2.58 percent, equaling the lowest ever, according to data from Concord, Massachusetts-based Municipal Market Advisors dating to January 2001. Bond yields move inversely to prices.

Interest rates have been driven to record lows as investors sought the perceived safety of the municipal market amid concern the economic recovery may be slower than expected. Demand for high-grade assets coupled with the state tax exemption boosted New York investor interest in the agency’s bonds, according to Matt Dalton, chief executive officer of Belle Haven Investments in White Plains, New York.

“They caught fire with retail investors,” said Dalton, who oversees $450 million in municipal holdings. “It was attractively priced and AAA-rated. That combination in New York is hard to find these days.”

Top-rated Sonyma, the biggest U.S. state housing-finance agency, sold bonds due in 2017 priced to yield 2.3 percent, or 38 basis points above a seven-year MMA index. That yield compares with April’s mortgage-backed securities of the same maturity, which had borrowing costs of 3.13 percent, or 55 basis points above the benchmark.

Extra Yield

Investors still demand extra yield for housing bonds because of the call option on the securities, said Mike Pietronico, who oversees $290 million in municipal holdings as chief executive officer at New York-based Miller Tabak Asset Management. Housing bonds can be redeemed before the due date because of early repayment or if the proceeds aren’t spent.

“They have little room to appreciate in price because issuers can call the bonds early for unexpended proceeds or prepayment,” Pietronico said. “In an environment where rates are falling, housing bonds are defensive and need to be priced cheaper for that reason.”

The agency’s sale came as Standard & Poor’s/Case-Shiller announced its June index of property values increased 4.2 percent from a year earlier. The median estimate of economists surveyed by Bloomberg News called for a 3.5 percent advance.

The Case-Shiller index is a moving three-month average, which means the June data are still being influenced by transactions in April and May that benefited from the government’s first-time homebuyer tax credit. A pullback in demand since that ended, mounting foreclosures and an unemployment rate near a 26-year high, may weigh on prices in coming months.

“There’s still a little bit of tarnish on it, but the AAA adds that extra layer of comfort,” Dalton said of Sonyma’s sale. “And there’s some pent-up demand for good quality New York paper.”

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

TENNESSEE STATE SCHOOL BOND AUTHORITY, which helps finance school construction and student loans, is offering $227 million in tax-exempts and $18 million in taxable debt through competitive sales today to refinance debt and fund capital expenditures at state universities. The bonds are rated at the second-highest investment grade Aa1 and AA+ by Moody’s Investors Service and Fitch Ratings, respectively, and AA by S&P, one level lower. (Added Sept. 1)

MINNESOTA, which sold $865 million in tax-exempts through competitive sale last month, plans to issue about $900 million in refunding bonds as early as next week. RBC Capital Markets, which won the competitive bidding in August, will lead underwriters in marketing this latest sale to investors. The state’s general obligations carry top ratings from S&P and Fitch, and Aa1 from Moody’s, one level lower. (Added Sept. 1)

To contact the reporter on this story: Brendan A. McGrail in New York at bmcgrail@bloomberg.net

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