Tax-Exempt Securities Extend Rally as Investors Seek Safety: Muni Credit
Top-rated, tax-exempt securities had their biggest rally since July as investors sought the perceived safety of municipal debt amid concern that Europe’s debt crisis will spread and after North Korea shelled a South Korean island.
The premium investors demand to hold Spanish government bonds over German counterparts jumped as Ireland sought aid to save its banking system. South Korea scrambled jet fighters and returned fire after North Korea shelled a border island.
Tax-exempt rates declined after the biggest supply surplus in more than a year drove record yield increases last week. This week’s reduced volume, coupled with investor desire for less risk, strengthened the rally, said Justin Hoogendoorn, a bond strategist at BMO Capital Markets in Chicago.
“Supply was impacting levels,” Hoogendoorn said. “European sovereign debt widening out and the Korean conflict, that’s the main impetus.”
Defaults for investment-grade municipal securities averaged 0.03 percent from 1970 through 2009, compared with 0.97 percent for similar corporate issues, Moody’s Investors Service said in February.
Five-year AAA municipal yields declined about 5 basis points to 1.35 percent yesterday, the most since July 22, according to a Bloomberg Valuation index. Yields, which move inversely to prices, fell at every maturity, BVAL benchmark indexes show. A basis point is 0.01 percentage point.
Slow Week
States and municipalities planned to sell about $5.7 billion in debt this week, the least since Sept. 10, Bloomberg data show. Trading is shortened to four days because of the U.S. holiday of Thanksgiving tomorrow.
“Being the holiday season, as volumes shrink it won’t take much to see some volatility on the long end of the yield curve,” said Matt Dalton, who oversees $450 million as chief executive officer of Belle Haven Investments Inc. in White Plains, New York.
Yields on debt due in 2040 this week have had the biggest two-day fall since Aug. 19, dropping 13 basis points to 4.36 percent yesterday, according to a 30-year BVAL benchmark index. Last week, the gauge rose 25 basis points.
The extra yield investors demand to hold Build America Bonds instead of 30-year Treasuries reached 191 basis points on Nov. 22 as U.S. government debt rallied.
Build Americas
Build Americas, which include a 35 percent federal subsidy on interest costs, are set to expire at year-end. More than $169 billion of the bonds have been sold since April 2009, when the program began under President Barack Obama’s economic stimulus.
This week’s rally is unlikely to continue as municipal sales pick up again, Hoogendoorn said. About $12 billion in offerings are slated next week, Bloomberg data show.
“We expect a couple weeks of heavy supply, which will put upward pressure on yields,” he said. “This week is a bit of relief from that.”
Following are descriptions of pending sales of U.S. municipal debt:
ILLINOIS, which shares Moody’s lowest state credit rating with California, will sell $1.46 billion in tobacco revenue settlement bonds through the Railsplitter Tobacco Settlement Authority, an entity established to issue the bonds, as early as next week. The bonds, backed by payments from a 1998 settlement with tobacco companies, will be used to pay bills and balance its budget. The state has been the recipient of $3.3 billion of tobacco settlement payments, according to the offering statement. Underwriters led by Citigroup Inc. will market the issue. (Updated Nov. 24)
PORT AUTHORITY OF NEW YORK AND NEW JERSEY, which owns the World Trade Center site in addition to operating Newark Liberty International, John F. Kennedy International and LaGuardia airports, will sell $840 million in tax-exempt bonds as early as next week. The issue will fund expansion of JFK’s Terminal Four, according to a Fitch Ratings report. Citigroup will market the issue, which is rated Baa3 by Moody’s and BBB- by S&P, both one level above junk, and BB by Fitch, second-highest speculative grade. (Updated Nov. 24)
CHICAGO, the third biggest U.S. city by population, plans to sell $804 million in tax-exempt and taxable general obligation bonds, including $214 million in Build America Bonds. The securities will refinance existing debt and fund street, sidewalk and gutter improvements, demolition of dilapidated buildings and contributions to the city’s pension funds. Chicago postponed the sale from mid-November for more favorable borrowing costs. Underwriters led by Loop Capital Markets LLC will market the issue, rated Aa3 by Moody’s, fourth-highest. (Added Nov. 24)
AMERICAN MUNICIPAL POWER INC., a Columbus, Ohio-based supplier to public electric systems, will sell $667 million in revenue-backed tax-exempt and taxable bonds, including $605 million in Build America Bonds. The issue will finance a 105- megawatt hydroelectric power plant at an existing dam on the Ohio River, according to an S&P report. Underwriters led by Wells Fargo will market the securities, which are rated A, sixth-highest, by S&P. (Added Nov. 24)
LOS ANGELES DEPARTMENT OF WATER & POWER, the largest U.S. municipal utility, plans to sell $493 million in taxable Build America Bonds as early as next week. The securities, backed by water system revenue, will fund ongoing capital improvements, according to a Fitch report. JPMorgan Chase & Co. will lead the marketing of the issue, which Fitch rates AA+, second-highest. (Added Nov. 24)
To contact the reporters on this story: Brendan A. McGrail in New York at bmcgrail@bloomberg.net; Alexandra Harris in New York at aharris48@bloomberg.net.
To contact the editor responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net
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