Treasury, Corporate Bonds Trail Build America, Tax-Free Returns in August

Build America Bonds and tax-exempt notes had their biggest gains in a year, as demand for municipal debt helped boost returns in August above corporate and U.S. Treasury securities.

Yields were driven to record lows last month as investors sought the perceived safety of the municipal market amid concern the economic recovery may be slower than expected. Demand for city and state obligations overwhelmed supply, said Neil Klein, a fixed-income senior portfolio manager at Carret Asset Management LLC in New York.

“You have a lot of investors that see risks in other investments,” said Klein, who oversees $800 million in municipal holdings. “The muni market is resilient, and the demand illustrates that.”

Tax-exempt bonds posted their best monthly performance since September 2009, returning 2.4 percent, according to the BofA Merrill Lynch Municipal Master Index, which tracks total return on tax-exempt bonds.

Build Americas had an eighth straight positive month, with the bonds’ Merrill index advancing 4.7 percent in August, the biggest gain since a 5.2 percent move in July 2009.

Average yields on the federally subsidized securities were 5.49 percent on Aug. 26, the lowest on record according to the Wells Fargo Build America index, which dates to August 2009. The index fell about 52 basis points during the month after ending July at 6.04 percent. A basis point is 0.01 percentage point.

‘Economic Volatility’

“August was mixed from an economics perspective, with some information saying the economy was tilting backwards, which affects corporates more,” Klein said. “Munis outperformed for that reason. They’re less reactive to economic volatility.”

Company debt returned 2.2 percent, according to Merrill’s U.S. Corporate Master Index, the highest August increase since 2004. The index has made positive gains for three straight months, and seven of eight this year.

U.S. dollar-denominated debt returned 2 percent, the highest since March 2009 and the best August performance since 2004, according to Merrill’s U.S. Treasury Master Index. Yields on 10-year Treasuries fell about 44 basis points during the month, reaching a 19-month low of 2.47 percent on Aug. 31.

“This solid performance won’t be sustainable,” Klein said. “As the economy gets better, money moves into riskier asset classes.”

U.S. stocks rose Sept. 1 by the most in almost two months as better-than-estimated growth in U.S. and Chinese manufacturing bolstered confidence in the global economic recovery.

Yields Rise

Yields on top-rated tax-exempt municipal debt due in 10 years rose 3 basis points to 2.61 percent on Sept. 1, the second rise since June 15, according to data from Concord, Massachusetts-based Municipal Market Advisors. Yields were unchanged yesterday.

“The municipal market had a very strong August, with good cash flow in muni funds and muni products,” said Evan Rourke, a portfolio manager with Boston-based Eaton Vance Corp., which has about $9 billion under management. “The question is what happens now?”

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

MINNESOTA, which sold $865 million in debt through competitive sales last month, plans to offer about $900 million in refunding bonds as early as next week. RBC Capital Markets will lead underwriters in marketing the issue to investors. The state’s general obligations carry top ratings from Standard & Poor’s and Fitch Ratings, and Aa1 from Moody’s Investors Service, one level lower. (Added Sept. 1)

ARKANSAS STUDENT LOAN AUTHORITY, which helps the state’s residents finance education, plans to sell $267.5 million in student loan asset-backed notes as soon as next week. The interest on the floating-rate securities will be determined relative to the three-month London interbank overnight rate, or Libor, and will carry top-ratings from Moody’s and Fitch, according to preliminary offering documents. RBC Capital Markets will underwrite the offering. (Added Sept. 2)

NORTH CAROLINA EASTERN MUNICIPAL POWER AGENCY, a wholesale power supplier to 32 cities and towns, plans to sell about $170 million in tax-exempt bonds Sept. 8 to refinance existing debt. The offering, rated by A- by S&P and Fitch, the fourth-lowest investment grade, will be marketed by underwriters led by Citigroup Inc. (Updated Sept. 2)

COLORADO SPRINGS, Colorado’s second most-populous city after Denver and home of the U.S. Olympic Training Center, plans to sell about $117 million in utility-system revenue bonds next week to fund capital projects and refinance existing debt. The offering includes $22 million in taxable Build Americas and $95 million in tax-exempts, and is rated Aa2 by Moody’s, and AA by S&P and Fitch, all third-highest. Piper Jaffray & Co. will lead underwriters marketing the bonds. (Added Sept. 3)

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

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