Mediocre AAA Bonds Ready to Rebound From Worst Rout: Muni Credit
Top-rated municipal bonds are poised to end their worst annual start in at least 19 years as the waning of debt insurance and borrowers’ deteriorating credit quality shrink supply.
Tax-exempt debt rated AAA has earned 0.94 percent this year through April 4 in price gains and interest, according to a Bank of America Merrill Lynch index. That’s less than half the 2.04 percent for the full market and the biggest difference since at least 1993, when the data begin.
Bonds with the best grade have shrunk from about 70 percent of those outstanding in 2007 to about 20 percent of the $3.7 trillion market now, according to Matt Fabian of Municipal Market Advisors. Debt insurers were stripped of their top ratings after losses on mortgage securities, while the longest recession since the 1930s led to municipal downgrades.
“Increased scarcity of AAAs will make people bid more aggressively for the ones that remain,” said Fabian, a managing director at Concord, Massachusetts-based MMA. “It’s a much stronger statement in 2012 to show a AAA rating than it was five years ago.”
Of the $82 billion of municipals sold so far in 2012, about 14 percent were top-rated, down from an average of 20 percent in the same period of the previous five years, according to data compiled by Bloomberg.
Currently, 13 states carry the Aaa rating of Moody’s Investors Service on their general-obligation bonds and two have an Aaa issuer rating, the same as a year ago, according to David Jacobson, a spokesman. Moody’s Aaa corresponds to the AAA mark used by Standard & Poor’s.
Among borrowers rated AAA selling next week is the Oregon Department of Administrative Services. It’s offering about $68 million of lottery-revenue securities to fund college- construction projects.
Investors have favored lesser-ranked bonds as the yield on top-rated general-obligations due in 10 years in a Bloomberg Fair Value index fell to 1.88 percent Feb. 6, the lowest since at least 1991. It was little changed yesterday at 2.3 percent.
“It’s more a reach for yield than anything else,” said Dexter Torres, head trader at Samson Capital Advisors in New York, which oversees $6.8 billion of munis. “People are looking for some sort of income, and they aren’t seeing it with AAAs.”
General-obligations due in 10 years in a Bloomberg index of BBB bonds yielded 3.68 percent yesterday. Demand for the securities drove down the difference with AAA debt to 136 basis points March 16, the lowest since August. A basis point is 0.01 percentage point.
More than half of new bonds were insured against default in the five years through 2007, according to Joe Deane, who helps oversee $16 billion as head of munis for Pacific Investment Management Co. in New York. The share was less than 10 percent last year, his February report shows.
Ambac Financial (ABK) Group Inc., MBIA Inc. (MBI) and Financial Guaranty Insurance Co., the three biggest muni insurers, had their AAA credit ratings cut amid losses from backing mortgage bonds. Those are the same securities that bankrupted Lehman Brothers Holdings Inc. in 2008.
Without insurance, investors now must examine the soundness of borrowers themselves, said Torres at Samson.
“Since the financial crisis, credit has become the story,” he said.
Moody’s has cut more ratings than were raised for 12 straight quarters. Five were lowered for every one lifted from October through December, a January report said.
In the first half of 2006, seven states had the top grade. Moody’s assigned higher ratings to 34 states and Puerto Rico in 2010 when it shifted criteria for municipals to match those used for company debt.
Moody’s may lower 453 top-rated issuers using a new evaluation method under consideration, it said in a March 19 report. The stand-alone U.S. public finance housing issues with mortgage enhancements would be capped at Aa1, a step below the highest grade, under the proposed change.
The amount of bonds involved is about $3 billion, less than 5 percent of the Aaa market share, Fabian at MMA said in an interview. That’s still about 25 percent of all of Moody’s municipal Aaa ratings, he said in a March 26 report.
Following are descriptions of coming sales:
LOS ANGELES, California’s most-populous city, plans to offer about $278 million of general-obligation refunding bonds as soon as next week. S&P rates the debt AA-, its fourth-highest investment grade. (Updated April 6)
CONNECTICUT (STOCT1) will issue about $260 million of tax-exempt and $83 million of taxable general-obligation bonds as soon as next week, according to Bloomberg data. The debt is rated AA by S&P, third-highest. Barclays Capital will lead banks. (Added April 6)
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