Municipal-Bond Sales to Rise on Low-Rate Refinancing, RBC Says

Low interest rates will encourage municipal borrowers to refinance debt in the last four months of 2011, said RBC Capital Markets LLC, which raised its forecast for long-term bond sales in the period to $100 billion.

As much as $275 billion of municipal bonds will be sold this year because of the increase, up from a previous estimate of $260 billion, Chris Mauro, an RBC analyst, said in a report today.

There is $166 billion of municipal debt currently eligible to be refunded, up from $140 billion in the same period last year, Mauro wrote. More issuance could mean higher yields if a weakening economy hurts the credit of borrowers and investors accelerate their exit from tax-exempt mutual funds, he wrote.

“An increase in average monthly issuance to $25 billion through year-end from $20 billion year-to-date could potentially put significant pressure on the municipal market,” he said.

The yield on top-rated 20-year tax-exempts was 3.4 percent today, the lowest since Oct. 27, according to data compiled by Bloomberg.

Low yields had prompted investors to withdraw money from municipal-bond mutual funds for six straight weeks through Aug. 30, according to Lipper US Fund Flows. Investors added about $565 million in the week through yesterday, Lipper said, the first inflow since July.

State and local governments sold about $129 billion of fixed-rated municipal debt in the fourth quarter of 2010, the most in a three-month period since at least 2003, Bloomberg data show. The flurry came as issuers took advantage of the Build America Bonds program, which provided a 35 percent federal subsidy on interest costs, before it ended Dec. 31.

If issuance reaches $275 billion this year, it would represent 83 percent of the tax-exempt debt sold for all of 2010, Mauro wrote.

To contact the reporter on this story: Michael McDonald in Boston at mmcdonald10@bloomberg.net.

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

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