The biggest outperformance by long-term tax-exempt debt since 2008 is helping issuers financing some of New York City’s largest infrastructure projects extend their borrowings beyond the usual outer limit of 30 years.
Thirty-year tax-free debt yields fell to about 3.7 percent yesterday, from 4.72 percent at the start of 2011, according to Bloomberg Valuation indexes. The gap above 10-year rates shrank to 1.15 percentage points, the narrowest difference since October 2008, according to data compiled by Bloomberg. Investors have been buying longer-dated securities as signs of a slowing economy help keep inflation expectations subdued.
“The long end remains very aggressively priced and issuer-friendly,” said Matt Fabian, managing director with Municipal Market Advisors, a Concord, Massachusetts-based research firm. “There’s little supply out there and there’s a fair amount of interest in owning munis from banks and insurance companies who are looking for long-lived assets.”
Hudson Yards Infrastructure Corp., which is helping extend subway service west of Midtown Manhattan, next week plans to sell $1 billion of debt due in 2047, its first offer in that maturity since 2006. New York Liberty Development Corp., formed to help finance rebuilding Lower Manhattan after the 2001 terror attacks, plans to issue about $1.3 billion next month, with some debt maturing in 40 years, for World Trade Center redevelopment.
The Port Authority of New York & New Jersey sold a record $1 billion of taxable 40-year bonds to fund Trade Center reconstruction last month, its longest issue since a tax-free offering of 100-year debt in 1994. The authority owns the Trade Center site.
The Federal Reserve’s plan to buy long-term Treasuries to support the economy has contributed to the decline in longer tax-free rates, Ebby Gerry, who manages $14 billion of municipal assets at UBS Global Asset Management Inc. in New York, said in a telephone interview. An increase in taxable buyers purchasing tax-exempt bonds also spurred the drop, he said.
Municipal debt due in more than 22 years has returned 11.3 percent this year, beating all other maturities, according to Barclays Capital index data. Investors have bought longer-term securities as local-government defaults have declined to about a quarter of last year’s pace, according to Bank of America Merrill Lynch data.
Fed Chairman Ben S. Bernanke said last week the central bank’s buying program is a “significant step but not a game changer” for reviving economic growth and reducing unemployment stuck near 9 percent. Consumer prices will probably increase 2.1 percent next year and 2.2 percent in 2013, according to the median forecast of economists in a Bloomberg News survey.
Economy ‘In Question’
“The trajectory of the economy is very much in question,” John Dillon, chief municipal-bond strategist at Morgan Stanley Smith Barney in Purchase, New York, said in a telephone interview. “And if that’s open to debate, people are more likely to buy longer-term bonds.”
Hudson Yards will use the bond proceeds to finance the extension of the No. 7 subway line westward in Manhattan from Midtown and the construction of a park.
“It’s fortuitous that interest rates have remained low,” said Alan Anders, deputy director of finance in the city’s Office of Management and Budget, and president of Hudson Yards. “We were lucky enough to hit a good market five years ago and again now.”
The city will subsidize interest payments on the bonds for the next seven years until the area generates sufficient revenue from business and residential development to cover those costs completely, according to the preliminary official statement.
Revenue securing the debt includes payments commercial developers will make to the corporation instead of real-estate taxes to the city and payments businesses will pay to increase their density, among other revenue.
Following are descriptions of pending sales of municipal debt:
LOS ANGELES COUNTY METROPOLITAN TRANSPORTATION AUTHORITY is set to issue about $235 million of revenue refunding bonds as soon as today, according to an offering statement. The authority, the largest public transit operator west of Chicago, serves about 1.5 million riders on an average weekday. The transaction will refund debt issued in 2001 and retire some commercial paper, and help build reserves. The bonds are rated Aa2, Moody’s third-highest grade. Stone & Youngberg LLC will lead a syndicate of banks on the deal. (Added Oct. 13)
PENNSYLVANIA, whose capital city of Harrisburg filed for bankruptcy this week, plans to sell $826 million of tax-exempt general-obligation debt through competitive bid on Oct. 18, according to a preliminary official statement. Proceeds will finance upgrades to public buildings, roads and bridges, and economic development projects, and also refund debt. The state is rated AA, Standard & Poor’s third-highest grade. (Added Oct. 13)
CALIFORNIA plans to sell $2 billion of general-obligation bonds as soon as next week to finance capital projects and refund existing debt. Goldman, Sachs & Co. and JPMorgan Chase will lead banks on the deal. The transaction is rated A1, Moody’s fifth-highest grade. (Added Oct. 12)
CITY AND COUNTY OF HONOLULU will sell $232 million of wastewater-system revenue bonds as soon as Oct. 13 to finance capital improvements and refinance debt. The utility system serves about 640,000 residents across 600 square miles. The bonds are rated AA, Fitch Rating’s third-highest grade. Bank of America Merrill Lynch will underwrite the deal. (Added Oct. 12)