Borrowing Costs Plummeting Across U.S. for Local Governments: Muni Credit
This was supposed to be the worst year ever for U.S. states and municipalities. Instead, they are obtaining money at the lowest interest rates in more than two years after predictions of rising defaults failed to materialize.
Issuers led by Massachusetts, Mississippi and the Port Authority of New York and New Jersey plan to sell about $67 billion of long-term tax-exempt debt from July through this month, the first time since at least 2003 that third-quarter offerings will rise from the previous three months, according to data compiled by Bloomberg.
The sales follow a drop in municipal-bond defaults to about $1.1 billion this year, a quarter of last year’s total, according to Bank of America Merrill Lynch. Local general- obligation bonds have accounted for only 1 percent of the 2011 failures. Banking analyst Meredith Whitney predicted on the CBS “60 Minutes” show in December that the next 12 months would see “hundreds of billions of dollars” of defaults.
While defaults have declined, state and local government revenue rose 6.9 percent in April through June compared with a year earlier, the biggest increase since the second quarter of 2006 and the seventh-straight quarter of growth, the U.S. Census Bureau said yesterday. The higher collections, along with the lowest long-term muni rates since January 2009, are encouraging issuers to borrow for capital projects, Justin Hoogendoorn, managing director of the strategic analytic group at BMO Capital Markets in Chicago, said in a telephone interview.
“They’ve had the benefit of improved revenue forecasts that allows them to start a few more capital projects and not have to cut quite as badly as what they originally thought,” Hoogendoorn said.
The Federal Reserve last week said it would buy long-term Treasuries to reduce interest rates on mortgages and loans in an attempt to spur economic growth. The announcement created a rally that pushed down municipal borrowing costs. Yields on 30- year top-rated tax-exempt bonds hovered at 3.47 percent yesterday after falling to 3.46 percent on Sept. 26, the lowest level since January 2009, when Bloomberg data for the securities begins.
The Port Authority and Massachusetts issued debt in the past week for projects ranging from reconstruction at the World Trade Center site to the renovation of roads and bridges. The estimated $67 billion of third-quarter issuance follows $55.8 billion of municipal bonds sold in the second quarter and $43 billion during the first three months of the year.
Municipal sales sagged at the start of 2011 after cities and states accelerated borrowing last year to take advantage of the taxable Build America Bond program and its 35 percent subsidy on interest costs that expired Dec. 31, Richard Ciccarone, managing director at McDonnell Investment Management in Oak Brook, Illinois, said in a telephone interview. The Build America program funded infrastructure projects and was part of President Barack Obama’s $825 billion economic-stimulus package.
Lower borrowing costs are encouraging lawmakers reluctant to take on additional debt, said Ciccarone. “That’s breaking down a little bit in part because the attractiveness of the rates is so strong,” Ciccarone said.
California this month paid 88 percent less on a $5.4 billion note sale compared with a comparable issue in November. It also sold $2.4 billion of long-term bonds this month with yields about a third less than two years ago.
Record Low Rates
Yields on top-rated 10-year municipals were 2.02 percent yesterday after falling to 2 percent on Sept. 23, the lowest level since 2009, when Bloomberg records for the debt begins. Municipals maturing in 10 years produced a total return of 9.47 percent this year, according to a Barclays Capital index that includes tax-exempt bonds with a weighted credit rating of Aa2 to Aa3.
Municipal issuance next year should return to its typical pattern of a busy first six months followed by a slow third quarter, said Jay Saakvitne, a managing director in U.S. public finance at Barclays Capital in New York.
“The things that caused this year’s aberration were one- time effects,” Saakvitne said. “It’s more likely that we’ll go back to a more standard calendar with heavier issuance in the first half of the year.”
Following is a description of a pending sale of municipal debt:
LOS ANGELES UNIFIED SCHOOL DISTRICT plans to sell $400 million of tax-exempt general-obligation bonds as soon as today to refinance debt. Los Angeles County property taxes will back the securities, which are rated Aa2, Moody’s Investors Service’s third-highest grade. Citigroup Inc. will lead the marketing of the deal. (Added Sept. 28)
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