State-Local Government in Best of Times for Finance: Muni Credit
In a boon to localities still rebounding from the recession that ended three years ago, investors looking for extra yield are adding the most money to longer-dated muni mutual funds since 2009. Those buyers face a shortage as issuers are refunding at the fastest pace since 1993, according to Bank of America Merrill Lynch. Many of those financings have maturities of 20 years or less.
The phenomenon is helping push tax-exempts due in more than 22 years to a gain of 9.3 percent this year, compared with 6 percent for the broader market, in the biggest advantage since 2009, Bank of America data show. Yields on 30-year munis have fallen about 12 times more than those on similar-maturity Treasuries this year, data compiled by Bloomberg show.
“The performance has been great on the long end because of descending rates and the lack of supply,” said John Hallacy, head of muni research at Bank of America. “The demand for long bonds has been strong, and there are fewer of them.”
Interest rates on state and city debt are near 45-year lows as investors seek the bonds as a haven from Europe’s financial crisis. Yields on 20-year general obligations fell to 3.73 percent last week, according to a Bond Buyer index. The gauge touched 3.6 percent in January, the lowest since 1967.
Local governments have cut about 550,000 jobs since a peak in 2008 as officials reduced costs amid declining revenue, Bureau of Labor Statistics data show. Municipalities hesitant to take on new projects just as tax receipts recover to pre- recession levels are instead saving money by retiring more expensive borrowings.
Of the $250 billion of sales this year through August, about 62 percent have been for refunding, on pace for the most in two decades, Hallacy said.
“A lot of supply has been biased toward shorter maturities because a lot of the issuance has been refunding,” said Brennan, whose company oversees about $90 billion in munis. “On most of the refundings we’re seeing, if the bonds have 15 years or 20 years to go, they’ll just replace them with bonds that match those maturities.”
Municipalities from King County, Washington, to Dublin, Ohio, will sell general-obligation refunding bonds this month, according to Bloomberg data. King County’s debt extends to 2034, while Dublin’s goes to 2027, the data show.
Bonds maturing in 20 or more years have composed about 53 percent of issuance in 2012, down from an average of 64 percent in the past decade, according to Bank of America. That’s as $10.7 billion has flowed into long-term muni funds, the most since 2009, Lipper US Fund Flows data show.
The Federal Reserve’s policy of replacing short-term debt on its balance sheet with longer-term bonds, dubbed Operation Twist, has also curbed yields on later-dated munis, Brennan said. The central bank has said it anticipates keeping its benchmark overnight rate near zero through at least 2014, boosting demand for higher-yielding assets.
Yields on 30-year tax-exempts rated AAA have dropped about 0.6 percentage point this year, to 3.01 percent as of yesterday, data compiled by Bloomberg show. The benchmark 30-year Treasury has declined about 0.05 percentage point, to about 2.84 percent. In trading yesterday, the benchmark 10-year muni was little changed at 1.75 percent.
While issuance of debt for new projects has shrunk as a ratio of sales, it still exceeds last year’s pace, Bank of America data show.
Arkansas in July sold debt due as far off as 2047 for water-waste disposal and pollution-abatement facilities. California issued about $519 million of 30-year bonds in April for public improvements such as highways and universities.
“With the limited supply and the tremendous amount of muni inflows we’ve seen in the past year, you’ve seen outperformance in the longer part of the curve,” said Dexter Torres, head trader in New York at Samson Capital Advisors, which oversees more than $6 billion of munis. “Refundings will probably still be the dominant portion of issuance through year-end.”
Following are pending sales:
OMAHA PUBLIC POWER DISTRICT in Nebraska plans to sell $550 million of tax-exempt bonds as soon as next week to refund debt, data compiled by Bloomberg show. (Updated Sept. 12)
CONNECTICUT is set to issue $570 million of general- obligation debt as soon as next week for capital projects, according to offering documents. (Added Sept. 12)
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