Zoo Shows Local Bond Sales Expand as Economy Grows: Muni Credit
Municipal debt is poised to trail Treasuries for two consecutive months for the first time since September as a growing U.S. economy spurs local governments to increase borrowing.
Localities from Massachusetts to Oregon are taking on bonds for uses such as roads and public buildings, helping boost issuance to a combined $64 billion for the past eight weeks, the biggest wave since 2010, data compiled by Bloomberg show. New debt comprised 44 percent of sales this month, the most since December, according to John Hallacy at Bank of America Merrill Lynch. The remainder went to refinance higher-cost securities.
Almost three years after the recession’s end, interest rates close to four-decade lows and confidence in the economy are coaxing states and cities to sell more securities for capital projects. The U.S. probably added jobs in May for a 20th straight month, the median forecast in a Bloomberg survey shows.
“At some point you have to rebuild the bridges and put money into these things,” said Robert Miller, senior portfolio manager in Menomonee Falls, Wisconsin, for Wells Capital Management, which oversees $28 billion in munis. Especially in the past week, “we saw a lot of deals coming into the market to take advantage of rates,” he said.
Increased issuance has helped cap muni returns. The $3.7 trillion market for local debt has earned 1.8 percent since March 31, compared with 2.6 percent for federal debt, according to Bank of America indexes. For all of 2012, munis are still beating Treasuries, by about 4 percent to 1.3 percent.
States and cities have sold about $141 billion of debt this year, up from $77 billion in the same period of 2011, data compiled by Bloomberg show. About 63 percent of the 2012 sales have been for refinancing, according to Hallacy.
Metro, the regional government for the Portland, Oregon, area, sold $140 million of bonds last week. Proceeds will go toward work including an expanded elephant habitat at the Oregon Zoo, said Margo Norton, Metro’s director of finance and regulatory services. Also this month, Massachusetts issued about $419 million for transportation projects such as refurbishing the Longfellow Bridge connecting Cambridge and Boston.
Investors and issuers “are getting more confidence that the economy is on the mend,” said Hallacy, Bank of America’s head of municipal research in New York. “The real laggard, housing, is starting to establish a real bottom. A lot of economic activity is linked to that.”
Home values in 20 U.S. cities fell in March at the slowest annual pace in more than a year. The S&P/Case-Shiller index of property values fell 2.6 percent from a year earlier after a 3.5 percent drop in February, the group said yesterday.
Federal debt has led a fixed-income rally since March as investors sought shelter from Europe’s debt crisis. Treasury yields traded close to record lows yesterday after Spain said it may need to sell bonds to rescue Bankia group.
“The Treasury trade has been a fear trade with everything that’s going on in Greece,” Miller said. “They’ve run and munis just haven’t run as much as they have.”
The yield on benchmark 10-year Treasuries reached as low as 1.71 percent yesterday, approaching the record 1.6714 percent set in September. The interest rate on top-rated munis maturing in 10 years is about 1.91 percent. As a result, the ratio of 10-year muni yields relative to Treasuries is about 109 percent, close to the highest this year.
A higher ratio means munis are cheaper relative to Treasuries. Investors such as Gary Pollack at Deutsche Bank AG’s private wealth unit in New York said this month they saw that as a signal to consider buying local debt.
Local-government yields are still close to the lowest since the 1960s, even after interest rates rose the past two weeks. Twenty-year general obligations yield 3.81 percent, according to a Bond Buyer index.
Falling interest rates helped Pennsylvania when it sold $950 million in bonds last month, its biggest issue for capital projects since 2010, said Rick Dreher, director of the bureau of revenue, cash flow and debt, in an interview. The state achieved its lowest-ever borrowing costs for its general-obligation debt, he said.
“Nobody likes to incur debt by issuing bonds,” said Colin MacNaught, assistant treasurer for Massachusetts, in an interview. “Particularly to support public safety and for a vibrant economy, you need to have roads and bridges and railroads. All that infrastructure needs to get done.”
Following are pending sales:
CITIZENS PROPERTY INSURANCE CORP., Florida’s state-run real estate insurer, is set to sell $1.25 billion of debt as soon as June 12, according to data compiled by Bloomberg. Proceeds will help finance insurance coverage for residents. The debt will be insured by Assured Guaranty Ltd. (Added May 30)
The NEW YORK CITY TRANSITIONAL FINANCE AUTHORITY plans to issue as soon as next month $1 billion of debt backed by future tax revenue, according to the city’s Office of Management and Budget. Standard & Poor’s rates the debt AAA. (Added May 30)
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