Bond Supply Near 5-Year High as Build America Deadline Looms: Muni Credit
U.S. states’ and municipalities’ scheduled debt sales approached the highest since 2005 this week as issuers seek to take advantage of the federally subsidized Build America Bond program before its potential year-end expiry.
The 30-day visible-supply index of new municipal issues reached $26.3 billion on Nov. 16, the highest since February 2005, according to data compiled by Bloomberg. The index dropped to $17.6 billion today.
Of the $11.3 billion of debt states and local governments are offering this week, about $4.2 billion are taxable Build Americas, the third-most since August 2009, Bloomberg data show. With such federally supported programs set to expire Dec. 31 unless lawmakers agree to an extension, supply may increase, said Justin Hoogendoorn, a bond strategist at BMO Capital Markets in Chicago.
“It won’t be a normal year-end,” he said. “There’s every incentive to come in and get funding.”
Since Nov. 1, the taxable securities have made up about 35 percent of total municipal issuance, compared with about 23 percent a week since the program began in April 2009, Bloomberg data show.
Thirty-year tax-exempts sold off from Oct. 25 through Nov. 18 when California cleared its sale of $10 billion in notes, with yields gaining about 77 basis points, or 0.77 percentage point, according to the Bloomberg Valuation index. Bond yields move inversely to price.
December won’t see the same kind of surge in yield even with a supply jump because bonds that matured Dec. 1 will provide investors with cash to make more purchases, said Matt Dalton, chief executive officer at Belle Haven Investments Inc. in White Plains, New York, which has $450 million in municipal assets.
“The maturities have created a healthy cash supply at the end of the year that will soak up a lot of the maturities,” Dalton said.
Yields on 10-year tax-exempts fell less than a basis point yesterday even as 10-year Treasury yields rose above 3 percent for the first time since July.
The extra yield investors demand for Build Americas above 30-year Treasuries was 195 basis points yesterday, down a basis point from a three-month high on Nov. 30, according to the Wells Fargo index.
A bill pending in the Senate would extend the Build America Bond program through 2011 while paring the subsidy to 32 percent of the interest cost from 35 percent. Almost $173 billion of the taxable debt has been sold since the program began in April 2009 as part of the economic-stimulus package.
If extended, total 2011 municipal issuance would be about $395 billion, compared with $345 billion if the program ends, Alex Roever and Chris Holmes, strategists at JPMorgan Chase & Co., said in a research note Nov. 24.
The bill would reduce the advantage of issuing Build Americas instead of tax-exempt securities by shrinking the subsidy 3 percentage points, the analysts said.
“A subsidy reduction of this magnitude, keeping other factors constant, would only modestly reduce the volume of BAB issuance from current levels,” they said.
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