Tax-Exempts Tumble as California Offers $10 Billion in Notes: Muni Credit
California Treasurer Bill Lockyer
Andrew Harrer/Bloomberg
California yesterday started taking investor orders on $10 billion in notes, which may yield from 1 percent to 1.5 percent according to preliminary price guidance from Treasurer Bill Lockyer’s office.
California yesterday started taking investor orders on $10 billion in notes, which may yield from 1 percent to 1.5 percent according to preliminary price guidance from Treasurer Bill Lockyer’s office. Photographer: Andrew Harrer/Bloomberg
Nov. 16 (Bloomberg) -- George Friedlander, a senior municipal-bond strategist at Citigroup Inc., talks about the municipal bond market. Friedlander speaks with Lisa Murphy on Bloomberg Television's "Fast Forward." (Source: Bloomberg)
Ten-year, top-rated tax-exempt yields, which move inversely to prices, climbed to a four-month high as California led states and local governments issuing $16.3 billion this week, the most in at least seven years.
California yesterday sold 44 percent of its $10 billion in notes to individual investors. The securities today are yielding 1.25 percent for May maturities and 1.5 percent for those due in June, according to a person with knowledge of the deal. That’s about 0.99 and 1.24 percentage points more than top-rated one- year municipal bonds, according to a Bloomberg Valuation index.
Ten-year AAA general obligations jumped 0.06 percentage point to 2.69 percent at 2:06 p.m. in New York, the highest since July 7, according to a BVAL municipal benchmark index. States and local governments plan to offer about $26.3 billion in debt during the next 30 days, according to the Bloomberg visible supply index, the most since February 2005.
“We’re going to need a bigger boat,” Tony Shields, a principal in the public-finance department at Williams Capital Group in New York, said in an e-mail. “New supply is close to unmanageable.”
Treasuries rose after the biggest two-day decline in almost two years as Federal Reserve Bank of New York President William Dudley said the central bank’s bond purchases won’t cause an inflation problem. Yields on 10-year notes fell two basis points to 2.91 percent as of 1:45 p.m. in New York, according to BGCantor Market Data.
Closed-end mutual funds that invest in muni debt also pared losses today. The funds, which borrow to boost returns by selling preferred stock, rose 1 percent at 2:44 p.m. in New York, after falling the most in two years yesterday.
Biggest Decline
The Nuveen Municipal Closed-End Index yesterday dropped 4.4 percent, the biggest one-day decline since Oct. 15, 2008, after losing 6 percent last week, the largest retreat since February 2009, Bloomberg data show. The selling yesterday sent long-term borrowing costs for California issuers to a two-month high relative to top-rated debt, Bloomberg Fair Market Value data show.
California and Illinois have the lowest state credit rating at A1, fifth-highest, from Moody’s Investors Service.
Last year when California sold $8.8 billion of similar notes in September, the state paid 99 basis points more than top-rated one-year securities for notes that matured in May and paid 124 basis points more on those due in June. A basis point is 0.01 percentage point.
Build Americas
The nation’s most-populous state later this week will begin marketing $3.75 billion in general obligations, including as much as $2 billion in Build America Bonds. The program for the taxable securities, which offer issuers a 35 percent federal subsidy on interest costs, is set to expire on Dec. 31.
Supporters are pressing for an extension in the lame-duck session of the Democratic-controlled Congress, which began yesterday. Prospects may grow dimmer in January, when Republicans, who have called President Barack Obama’s $814 billion stimulus too costly, take control of the U.S. House of Representatives and reduce the Democratic majority in the Senate.
“The overall muni-market has had a horrible three days,” said George Friedlander, a senior municipal-bond strategist at Citigroup Inc. in an interview. “At some point the market will stabilize when it gets cheap enough, but it’s hard to get there until we know more about what is going to happen to the Build America program. There will be a buying opportunity here at some point, but I’m not ready to call it that yet.”
To contact the reporters on this story: Brendan A. McGrail in New York at bmcgrail@bloomberg.net; Michael Marois in Sacramento at mmarois@bloomberg.net
To contact the editor responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net
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