New York Bonds Trade in AAA League as Wall Street Payouts Swell

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Andrew Cuomo
NY Governor Andrew Cuomo. Photographer: Richard Drew/Pool/Getty Images

New York is punching above its weight in the municipal-bond market, trading like it has a AAA credit rating. It can thank Wall Street’s misdeeds.

Buoyed by more than $7 billion from legal settlements with banks, New York passed its fifth consecutive on-time budget and still has $1.5 billion left over. That’s led investors to push its 30-year bond yields below top-rated debt by the most since at least 2013. They’re shrugging off a political corruption probe that snared the state’s two highest-ranking lawmakers.

“Regardless of all the ethical issues going on, you can’t beat the numbers,” said Howard Cure, director of municipal credit research in New York for Evercore Wealth Management LLC, which oversees $5.9 billion. “The budget is considered to be structurally balanced and the extra windfalls are being spent responsibly.”

The latest jackpot came on May 20, when Barclays Plc agreed to pay New York, Wall Street’s home state, $485 million for conspiring to rig foreign-exchange rates. That’ll add to coffers that swelled in the past year as more than a dozen other financial-services companies paid to settle violations including tax-fraud, dealing with countries blacklisted by the U.S. and misleading investors about the toxic mortgage-backed bonds behind the 2008 credit crisis.

Bridge Money

The state’s fiscal outlook has brightened because of the extra cash and Governor Andrew Cuomo’s self-imposed two percent limit on annual spending growth. He used the influx for one-shot items, such as helping to finance a replacement for the Tappan Zee Bridge, instead of expenses that will continue after the money’s gone.

The Empire State has its highest credit rating since 1972 after Standard & Poor’s raised it in July to AA+, one step below AAA and equivalent to its rank from Moody’s Investors Service. That’s put it close to joining the 14 states that get top general-obligation grades from one of the two credit-rating companies.

Investors are treating New York like it already has. The state’s 30-year bonds yield 3.37 percent, 0.06 percentage point less than benchmark debt, according to data compiled by Bloomberg. The yields slipped as much as 0.3 percentage point below the benchmark in March, the most since records began in 2013.

Buyers demand higher yields on 30-year debt sold by all eight of the AAA states tracked by Bloomberg. New York’s 10-year yields are less than top rated Texas, Florida and Georgia.

Loved Less

New York’s lawmakers don’t enjoy such high esteem. On Jan. 22, Sheldon Silver, the Democrat who ruled the Assembly as speaker for more than 20 years, was arrested on charges he pocketed almost $4 million from kickback schemes. On May 11, Dean Skelos was ousted as Senate Majority Leader after the Republican was accused of using his power over real-estate laws to enrich his son. Both Skelos and Silver say they’ll be exonerated.

Meanwhile, Cuomo’s administration is being investigated by federal prosecutors for dismantling an anti-corruption panel last year.

Even with the turmoil, the governor and lawmakers agreed on an annual budget before the new year began on April 1. That marked the longest stretch of on-time spending plans in at least four decades. Last fiscal year, New York’s revenue rose 5.7 percent, three times faster than spending.

Hiding Sins

“If the corruption leads to dysfunctional government and that leads to poor fiscal management, that would play out on the credit in the long-run,” said Charles Grande, head of muni research in New York at UBS Global Asset Management. Otherwise, he said, revenue “growth hides all sins.”

Cuomo stabilized the state’s finances before the settlement cash began rolling in, in part by limiting annual spending growth even as tax collections rebounded from the recession.

That allowed him to cut taxes and spend the settlement surplus on pet projects, including $1.5 billion for economic development upstate, said Morris Peters, a spokesman for Cuomo’s budget division.

“We’re spending one-time resources to fund one-time purposes,” Peters said by e-mail. “Investors continue to reinforce the value of New York’s fiscal discipline.”

While New York bonds are always in demand from residents looking for tax-free income, there’s even more interest now, said Fred Yosca, head of fixed-income trading at BNY Mellon Capital Markets LLC in New York.

“The state’s doing well,” he said. “There’s no structural budget issues and they’re running surpluses.”

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