Overseas Buyers Increase U.S. Municipal Bond Holdings 15% to $83 Billion
Foreign investors boosted their holdings of U.S. municipal bonds by 15 percent in the second quarter, signaling that local officials continue to draw overseas buyers as they raise money for public works projects.
Buyers outside the U.S. held $83 billion of municipal bonds by the end of June, up from $71.9 billion three months earlier, the Federal Reserve Board said yesterday. The increase follows a 19 percent leap in purchases by the group in the previous three months.
The increase has coincided with the growth of the market for Build America Bonds. The taxable securities were created under last year’s economic stimulus program as a way to lower borrowing costs for local public works projects. The bonds pay higher yields than traditional tax-exempt debt because they don’t confer tax breaks, making them attractive to international investors who don’t traditionally buy municipal debt. The Treasury pays 35 percent of Build America Bonds’ interest costs.
Buyers outside the U.S. are drawn by the higher yields on the securities compared with other types of government debt, said Matt Fabian, managing director of Concord, Massachusetts- based Municipal Market Advisors.
“There isn’t much to compare with the amount of yield as an investor you can get with Build America Bonds,” Fabian said. “They’ve been a good investment and they have very high coupons, very high yields. As an investor, what’s not to like?”
5.76 Percent Yield
The average Build America Bond yields 5.76 percent, according to a Wells Fargo & Co. index with an average maturity of about 29 years. That’s about 1.85 percentage points more than 30-year Treasuries. For investors, the securities have returned 12.6 percent this year, according to Bank of America Merrill Lynch indexes.
Issuers have sold more than $134 billion of Build America bonds. The program is set to lapse at year-end, which has spurred some officials to raise money before the subsidy disappears or is pared back under proposals in Congress.
The $2.8 trillion municipal-bond market is still dominated by individual investors who are seeking returns exempt from federal income tax.
Households owned $1.03 trillion in municipal bonds at the end of the second quarter, little changed from the previous period. Mutual funds boosted their holdings by $12.9 billion, or 2.6 percent, to $514 billion, according to the Fed.
To contact the reporter on this story: William Selway in Washington at wselway@bloomberg.net
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