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New Jersey Agency Debt Costs Soar as Yields Rise: Muni Credit

New Jersey Governor Chris Christie
The New Jersey Economic Development Authority scaled back the week’s largest bond offering as tax-exempt municipal yields climbed and Governor Chris Christie made comments about the state’s financial well-being. Photographer: Emile Wamsteker/Bloomberg

Jan. 14 (Bloomberg) -- The New Jersey Economic Development Authority scaled back the week’s largest bond offering as tax-exempt municipal yields climbed and Governor Chris Christie made comments about the state’s financial well-being.

A New Jersey general-obligation note due in August 2015 traded at an average yield of 2.51 percent yesterday afternoon, or 90 basis points over top-rated four-year debt, according to a BVAL index. The same security traded at 2.1 percent a week ago, 57 basis points above the benchmark.

Municipal bonds suffered their worst quarterly performance in 16 years in the three months ended Dec. 31. Investors pulled a net $22.7 billion from muni mutual funds in the past nine weeks, according to data from the Investment Company Institute in Washington. Vanguard Group Inc., the world’s largest mutual-fund company, withdrew a request filed last year with regulators to open three municipal-bond index funds amid concern that state finances may deteriorate.

“Historically, individuals want to buy 10-year muni bonds with a 4 percent yield,” Matt Fabian, managing director at Concord, Massachusetts-based Municipal Market Advisors, said yesterday on Bloomberg Television.

“With all the headlines and all the bad news, you expect those yields to be a fair amount higher,” he said. “The market is struggling to find a bottom at this point. I don’t think we have found it yet.”

Scaled Back

The authority yesterday slashed its tax-exempt offering 47 percent to $777.5 million, citing market conditions. About 20 minutes before the deal was scaled back, Christie told a town-hall meeting in Paramus that health-care spending “will bankrupt” the state unless it requires its workers to pay more for medical coverage.

“Given market conditions, it would have been unwise and imprudent to put the substantial benefits achieved with this sale at risk by trying to sell more bonds at higher rates,” Andrew Pratt, a spokesman for Treasurer Andrew Sidamon-Eristoff, said in an e-mail.

Christie’s comments may have added to investor concern about the state’s finances, said Gary Pollack, head of bond trading at Deutsche Bank Private Wealth Management in New York.

“He is scaring some people when he says the state is going bankrupt,” Pollack said. “It wasn’t timed well.”

The state priced securities maturing in September 2020 to yield 4.64 percent, or 146 basis points above top-rated nine-year debt, a BVAL index shows.

When New Jersey priced its last series of school construction bonds, a $716.3 million deal in April, the so-called spread of tax-exempt bonds maturing in nine years was 91 basis points more than the benchmark.

Terminate Swaps

As part of the deal, the state had planned to borrow about $245 million through taxable securities to help pay $295 million in termination costs related to interest-rate swaps on variable-rate debt, Pratt said. The balance of the termination payment will come from a premium investors will pay on the bonds.

The taxable offering was slashed about 50 percent to $123.2 million. The authority had $3.6 billion in outstanding swap agreements as of Dec. 31, preliminary offering documents show.

To contact the reporter on this story: Brendan A. McGrail in New York at bmcgrail@bloomberg.net

To contact the editor responsible for this story: William Glasgall at wglasgall@bloomberg.net

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