Borrowing Shows No Sign of Impeding July Win Streak: Muni Credit
Borrowing by U.S. states and cities is about to leap 80-fold this week. If history is any guide, the jump in supply probably won’t derail the longest rally for the $3.7 trillion municipal bond market since 2007.
Local-government returns have been positive in every July dating to 2006, Bank of America Merrill Lynch index data show. The gains have been fueled by investors who receive bond payments and lower borrowing costs for most states as they enact budgets for the fiscal year, according to a Citigroup Inc. report.
Bondholders will receive about $41 billion in coupon and principal payments in July, the biggest monthly total this year, according to Chris Mauro at RBC Capital Markets in New York. Investors may begin pumping some of that cash back into munis this week as issuance increases to $8.2 billion from $104 million during the Independence Day week, according to data compiled by Bloomberg.
“With all the reinvestment money coming back into the market, people will be looking to put that to work,” said Lyle Fitterer, managing director at Wells Capital Management, which oversees about $30 billion in municipal securities.
The municipal market had its sixth-straight quarterly gain in the three months ended June 30, the longest streak since 2007, Bank of America data show. The July rally is poised to continue as government finances improve following the 18-month recession that began in December 2007.
State tax collections have increased for nine consecutive quarters, the Nelson A. Rockefeller Institute of Government in Albany, New York, reported. That helped every state adopt a budget on time for fiscal 2013. In the past four years, states failed to enact budgets by their deadlines 13 times, according to Moody’s Investors Service.
“The credit situation is improving,” Fitterer said from Menomonee Falls, Wisconsin. “We’re nowhere near out of the woods, but the fact that fundamentals are getting better means spreads should be getting tighter, and they are.”
The extra yield over top-rated bonds that investors demand to hold BBB general-obligation debt declined to 1.27 percentage points on July 5, the least since October 2009, according to a Bloomberg Fair Value index.
Such penalties for lower-rated municipalities usually narrow most after they enact budgets, said George Friedlander, senior municipal strategist at Citigroup in New York.
Minnesota, the only state to not pass an on-time budget for fiscal 2012, saw its municipal debt rally in July 2011 after lawmakers came to an agreement to end a government shutdown.
The difference between Minnesota state and local general- obligation debt and top-rated bonds increased to 0.28 percentage point on July 5, 2011, the widest since October 2008, according to Bloomberg Fair Value index data. On July 21, the day after the shutdown ended, the securities were yielding 0.02 percentage point less than the AAA index.
The amount of local-government debt scheduled for sale in the next 30 days is about $9.3 billion, after falling to $4.5 billion on July 2, the lowest since January, Bloomberg data show. Issuers sold about $46 billion of debt in June, the most for a month since October 2009, the data show.
Even with “a pretty healthy week of supply,” yields will probably fall, said Justin Hoogendoorn, managing director at BMO Capital Markets in Chicago.
The calendar swelled this week, in part from anticipation of the New York City Transitional Finance Authority’s sale of $850 million in bonds, New York State’s Metropolitan Transportation Authority borrowing $500 million and Columbus, Ohio, issuing about $447 million, according to Bloomberg data.
The deals will be met by the biggest inflow of cash into municipal-bond mutual funds in three years, Lipper US Fund Flows data show. The funds added $15.7 billion through July 4, the most for the period since 2009.
“Certainly through at least the middle of July, there’s no reason for the market to back off,” Friedlander said. “The amount of cash in investors’ hands has been really strong.”
Following are pending sales:
ILLINOIS plans to issue about $1.5 billion in revenue bonds for its unemployment-insurance fund as soon as next week, according to an offering document. The proceeds will repay federal government advances. Standard & Poor’s rates the debt AA, its third-highest grade. (Added July 9)
THE STATE OF WASHINGTON will sell $573 million in general- obligation debt as soon as July 18, according to Moody’s. About $119 million is federally taxable, with the rest tax-exempt. Proceeds will be used for transportation projects and other capital improvements. Moody’s rates the bonds Aa1, second- highest. (Added July 9)
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