Jan. 12 (Bloomberg) -- New York City, the biggest municipal borrower after California, plans to sell more than $1 billion of tax-exempts this week, as yields of top-grade issues hover close to 12-month highs.
The city’s Transitional Finance Authority plans to offer $875 million of income-tax backed bonds, its largest tax-exempt sale since February, 2007. In 2010 the authority sold about $3 billion of Build America Bonds, whose interest is subject to federal tax, and about $1 billion exempt from federal, state and city income tax, according to data compiled by Bloomberg.
“There’s been a dearth of conventional municipal bonds from the city, and there could be somewhat of a tail wind for demand for the New York paper, given that there was so little of it last year,” said Christopher Dillon, a municipal strategist at Baltimore-based T.Rowe Price Associates, which manages $15.3 billion of tax-exempt securities.
The scant supply of new tax-exempts from the city would have benefited New York more, except for the rising trend in bond yields since November, Dillon said. Headlines about state and local government budget deficits and pension liabilities have helped lift yields at the same time as investors fled the market late last year, he said.
U.S. states face fiscal 2012 deficits totaling $140 billion, the Center for Budget & Policy Priorities said in a December report. New York City’s Nov. 18 financial plan projected a deficit of $2.36 billion in a $65.2 billion budget for the year beginning July 1.
Yields of top grade AAA 10 year bonds declined 0.03 percentage point to 3.22 percent in yesterday’s trading, down from a high of 3.30 percent on Jan. 3, according to a Bloomberg fair valuation index dating to July 2010. The 10-year yield was 2.45 percent as recently as Nov. 8.
About $334 million of orders from individuals for Transitional Finance Authority bonds were received in the past two days, according to Raymond Orlando, a city spokesman. Yesterday, the bonds were tentatively priced to yield 1.97 percent for the November 2015 maturity, rising to 3.54 percent in 2020 and 4.52 percent in 2026, said a person familiar with the deal who wasn’t authorized to speak publicly.
Those yields could change, depending on demand from institutional buyers. The largest part of the sale, $232.9 million of bonds due in 2039, is still to be priced.
Yesterday, 5 percent authority bonds due in January 2020 were purchased from customers at 3.80 percent in trades of $1 million or more each, according to data compiled by Bloomberg.
The success of the Transitional Finance Authority sale may determine whether municipal bond yields continue rising, said Robert Amodeo, a portfolio manager with Pasadena, California-based Western Asset Management Co., which oversees $40 billion of municipal bonds.
“If you place a large deal, it could really settle people’s minds,” Amodeo said. If demand from individual investors is good “the market tends to improve in tone,” he said. “That could be the case looking ahead.”
A $136.4 million competitive sale of New York City general-obligation bonds is scheduled tomorrow, followed on Jan. 19 by $450 million of the city’s Municipal Water Finance Authority bonds through underwriters led by Jefferies & Co.
The Transitional Finance Authority was created in 1997 to circumvent limits on its general-obligation bond sales. The authority’s securities are insulated from the city’s budget deficits because state law doesn’t allow it to file for bankruptcy and they are backed by the city’s income tax and if needed, its sales tax, according to a report by Moody’s Investors Service.
New York City’s general-obligation and authority debt is limited to 10 percent of the full value of taxable real estate, giving it about $24 billion of unused debt issuance capacity, the Moody’s report said.
The authority’s bonds are ranked Aa1 by Moody’s, its second-highest grade, and top rated by Standard & Poor’s and Fitch Ratings. Water authority bonds, backed by user charges, are one level lower at Aa2 by Moody’s and AA+ at S&P and Fitch. General obligation bonds are Aa2 by Moody’s and AA by S&P and Fitch.
A snow warning led New Jersey officials to postpone until tomorrow pricing for institutional buyers of $1.9 billion of bonds to restructure outstanding school construction debt, according to Andrew Pratt, a spokesman for state Treasurer Andrew Sidamon-Eristoff.
“The New York area forecast is for heavy snow, calling into question whether normal communications between banks and investors will be possible,” Pratt said.
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