Sales Slip to 7-Year Low as Issuers Curb Spending: Muni Credit

Municipal bond sales this week and last are set to be the lowest for the period around Labor Day in seven years as issuers curb borrowing for infrastructure work.

States and cities will sell a combined $5 billion of long-term tax-exempt debt in the nine market days of Aug. 29 through Sept. 9, the least in the period since 2004, according to data compiled by Bloomberg.

Local and state governments have reduced payrolls by 671,000 positions since August 2008, and the U.S. failed to add any jobs in August, discouraging officials from borrowing for roads, bridges and other projects, said Matt Fabian, a managing director at Municipal Market Advisors, a research company in Concord, Massachusetts.

“When you have that kind of job loss, you have to assume that construction spending is not on the front burner,” Fabian said in a telephone interview. “It underscores the issuers’ austerity trends and the scarcity of new-issuance trends that we’ll be seeing for awhile.”

Shrinking revenue prompted 69 percent of U.S. cities to delay or cancel infrastructure spending in 2010, according to a National League of Cities survey of local finance officers.

Cities also lowered spending with personnel cuts, service reductions, changes to health-care benefits and public-safety curbs, the October report showed. Eighty percent of finance officers forecast their cities will be less able to meet needs in 2011 than in 2010, the survey said.

Yearly Issuance

Total municipal issuance so far this year has been $144.6 billion, according to data compiled by Bloomberg, $107.8 billion less than the same period in 2010, when federally subsidized Build America Bonds encouraged borrowing.

Tax-exempt yields will fall further below their 2011 lows after Treasuries rallied last week in response to the August jobs report, Fabian said. U.S. 30-year yields fell to the lowest since January 2009 as the monthly employment data were the weakest since September 2010.

Yields on top-rated 10-year municipals closed last week at 2.23 percent, following a 2011 low of 2.17 percent on Aug. 23. The yearly average is 2.87 percent. Yields on top-rated 30-year tax-exempts fell to 3.82 percent last week, near the lowest of the year. The 2011 average is 4.52 percent.

The low yields are discouraging some investors: Municipal bond mutual funds posted $282 million of outflows last week, the sixth consecutive week of withdrawals.

More Incentive

Issuers may have to offer higher yields to lure buyers, especially if issuance picks up, said Gary Pollack, head of bond trading at Deutsche Bank AG’s private-wealth management unit in New York.

“As we sink lower, it’s going to test the market’s ability to hold these levels, given the absolutely unattractive low levels of interest rates,” said Pollack, who oversees $12 billion of tax-exempt and taxable assets.

This week’s issues will be led by Harris County, Texas, which includes Houston. It plans $510 million of tax-exempt sales-tax-backed bonds to expand a light rail system and buy new buses. The debt is rated Aa2 by Moody’s Investors Service, its third-highest grade.

The New York State Thruway Authority will offer $350 million of personal-income-tax revenue bonds to finance highway and bridge projects. The bonds are rated AAA, Standard & Poor’s highest rating.

Fulton County, Georgia, which encompasses Atlanta and is the state’s most populous county, will sell $257.6 million of water and sewer revenue refunding bonds. The bonds are rated Aa3 by Moody’s, the fourth-highest grade.

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