Tax-Frees Top Treasuries for First Time in a Month: Muni Credit

Yields on top-rated tax-exempt 10-year debt exceeded those of comparable U.S. Treasuries for the first time since Dec. 1 as investors favored shorter-term debt amid slower municipal issuance.

Top-rated tax-exempts due in 10 years yielded about 100 percent of comparable Treasuries on Jan. 3, the most in more than a month, according to data compiled by Bloomberg. Thirty-year munis yielded 108 percent of what federal debt offered. The bigger ratio makes municipal bonds more attractive relative to Treasuries. Five-year debt yielded just 94 percent of government bonds.

Investors have been reluctant to buy long-term muni debt after the end of new issues of Build America Bonds, driving prices down, said John Dillon, chief municipal strategist at Morgan Stanley in Purchase, New York. Yields move inversely to prices.

“Specifically, out beyond 15 years have really underperformed in the last month,” Dillon said. “There’s uncertainty in the marketplace about future supply post-BABs.”

Build Americas, which were commonly issued for longer durations to take advantage of the 35 percent federal subsidy on interest costs, accounted for about 23 percent of municipal issuance since the program began in April 2009, Bloomberg data show. Since the program ended Dec. 31, issuers may sell more longer-dated tax-exempts.

“How deep is the demand going to be, and how big is the supply going to be?” Dillon said. “Those are big unknowns.”

Yields on 30-year Treasuries jumped about 1 basis point to 4.41 percent yesterday in New York. Rates on top-rated tax-exempts due in 2041 climbed 2 basis points to 4.7 percent, according to Bloomberg Valuation indexes. A basis point is 0.01 percentage point.

‘Compelling’ Ratio

“The ratio looks particularly compelling,” said Laura LaRosa, who helps manage $4.5 billion in municipal debt at Glenmede Investment & Wealth Management in Philadelphia. “When people understand that, they’ve got to start coming into the market to buy. It doesn’t make sense not to.”

Some investors are willing to forgo the tax-exemption on muni investments as they prefer the ease with which Treasuries can be bought and sold, LaRosa said. As the market begins to pick up, municipals may have some added liquidity, she said.

“We put bonds out for bid today and we’re seeing a really good response,” LaRosa said. “We may have turned a little bit of a corner here.”

About $5.2 billion in debt is scheduled to be sold in the next 30 days, according to the Bloomberg visible supply index. The gauge’s daily reading averaged $11 billion during 2010.

“You’re not going to get much clarity until you start to get some decent supply.” Dillon said. Until there are more scheduled offerings, “it’ll be difficult to see what demand really looks like,” he said.

Following are descriptions of pending sales of U.S. municipal debt:

PARTNERS HEALTHCARE SYSTEM, which includes Brigham and Women’s and Massachusetts General hospitals, plans to sell $271 million in tax-exempts through the Massachusetts Development Finance Agency tomorrow to fund construction and renovation projects. The debt, backed by system revenue, is rated Aa2 by Moody’s Investors Service, and AA by Standard & Poor’s and Fitch Ratings, all third-highest. JPMorgan Chase & Co. will market the securities. (Added Jan. 4)

SEATTLE CITY LIGHT, a municipally owned utility that provides power to about 1 million people, will sell about $308 million in taxable and tax-exempt electricity revenue bonds next week to refinance existing debt and fund capital improvements. The offering comprises two competitive sales, including $10 million in taxable Clean Renewable Energy bonds. The agency’s revenue bond sale in May was rated Aa2 by Moody’s, its third-highest investment grade.

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