Texas Borrows to Pay Unemployment Benefits as Spread Narrows: Muni Credit

Texas, the second most-populous U.S. state, avoided paying higher interest rates on federal obligations with the sale of $854.7 million in debt to cover unemployment benefits.

The so-called spread on a similar borrowing Nov. 18 narrowed even as rates in the broader municipal market rose to their highest since Nov. 19 along with U.S. Treasury yields yesterday. President Barack Obama’s accord with Republican leaders to extend tax cuts led investors to dump bonds, said John Bonnell, who helps oversee $6.9 billion including munis at USAA Investment Management Co. in San Antonio.

Texas, which is borrowing through the Texas Public Finance Authority, didn’t expect the selloff in yesterday’s market to affect plans to offer no more than 3 percent, said Dwight Burns, the agency’s executive director.

“That created some more uncertainty,” said Burns. “But not enough to affect our transaction.”

Tax-exempt yields also increased as an extension of the taxable Build America Bond program looked in doubt, said Bonnell. Build America interest-costs are subsidized at a rate of 35 percent by the federal government and the program is set to expire Dec. 31 unless Congress extends it.

Texas sold its second bond issue in a month -- with the previous issue’s longest maturity offering 2.63 percent -- designed to reduce its cost for paying jobless benefits once the U.S. government starts charging interest next year. The state will avoid paying rates of 4.5 percent, according to estimates as the sale was being prepared in September.

Rising Yields

Texas’s bonds did “not come cheap,” said Anthony Valeri, a market strategist with LPL Financial Corp. in San Diego, which oversees $293 billion of assets. The state “didn’t do that bad considering the weakness in the market” he said.

Yields, which move inversely to prices, rose across the spectrum of maturities, according to Municipal Market Advisors data. Yields rose 2 basis points, or 0.02 percentage point, in the first four years of the curve and 5 basis points in the 10- year maturity. The increases weren’t as much as U.S. Treasuries, where 10-year maturities rose 15 basis points, Carolyn Dolan, principal at Samson Capital Advisors LLC in New York, said yesterday.

“Municipals didn’t fall as much as Treasuries,” said Dolan, who helps oversee $7.3 billion of assets. “Munis are still relatively cheap.”

Texas sold $1.1 billion of similar bonds with a maximum maturity of 7 years Nov. 18. Since then, yields on the long maturities compared with top-rated debt have narrowed 29 basis points to 1 basis point as of Dec. 2 on the 7-year portion in secondary market trades, according to data compiled by Bloomberg.

Going Broke

More than half of U.S. states have run out of money in their unemployment trust funds, financed by payroll taxes, because of joblessness persisting from the longest recession since the Great Depression. Texas had an 8.1 percent unemployment rate in October, when the national level was 9.6 percent.

States have borrowed about $41.4 billion from the federal government which has been providing the cash, without charging interest, under the economic-stimulus package enacted in 2009.

Following is a description of a pending sale of U.S. municipal debt:

NEW YORK LIBERTY DEVELOPMENT CORP., a state arm created to finance loans for lower Manhattan construction, will sell about $1.3 billion in tax-exempts this week to refinance existing debt from the World Trade Center project, according to Standard & Poor’s, which assigned a rating of AA-, fourth-highest. The bonds are backed by support payments from the Port Authority of New York & New Jersey, which owns the site, and rent from New York City, S&P said in a Dec. 1 report. Goldman Sachs Group Inc. will lead banks marketing the bonds. (Updated Dec. 7)

To contact the reporter on this story: Darrell Preston in Dallas at dpreston@bloomberg.net.

To contact the editor responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net

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