Texas Outperforms AAA States With U.S. Defense Cuts: Muni Credit
Looming U.S. defense-spending cuts that threaten almost 160,000 Texas jobs are unlikely to halt a municipal-bond rally that’s beating seven other top-rated states tracked by Standard & Poor’s.
Texas bonds have returned 6.22 percent this year through Sept. 19, outperforming states that have a top general- obligation rating from Standard & Poor’s or Moody’s Investors Service and whose performance is tracked by S&P. Florida ranks second with 6.16 percent, followed by Delaware at 5.17 percent.
Across-the-board federal cuts aimed at reducing the U.S. debt, scheduled for as soon as January, may cost about 99,000 jobs in Texas through Defense Department-related reductions, plus 60,000 from other agencies, according to Stephen Fuller, a public policy professor at George Mason University in Virginia. Even so, the diversity of the nation’s second-biggest economy shields it from cutbacks and lures bond investors, said John Bonnell at USAA Investments in San Antonio.
“There is a lot of demand for almost everything in Texas,” said Bonnell, an assistant vice president of mutual fund portfolios at USAA, which manages about $50 billion. “The credit quality in Texas is very strong.”
Texas state and local debt is beating the 5.9 percent gain in the $3.7 trillion municipal market this year, S&P data show. Bond investors handed Texas Governor Rick Perry, a Republican who has been in office since 2000, a win last month, when he sold $9.8 billion of one-year notes at a lower relative borrowing cost than California. Both sales had S&P’s highest short-term grade.
Texas borrowed at a yield of 0.23 percent, or 0.04 percentage point above AAA one-year munis, data compiled by Bloomberg show. In California’s sale last month of $10 billion of notes maturing in May and June, the extra yield was at least 0.17 percentage point.
For general-obligation debt, Texas has a top rating from Moody’s and one step lower from S&P. California’s S&P rating is A-, lower than any state. As municipal interest rates sank to 45-year lows this year, investors have bought California securities for their higher yields.
Bonds of the most-populous state have returned 6.8 percent this year, beating Texas. Investors demanded as little as 0.26 percentage point this week to own 10-year debt of California issuers rather than borrowers from Texas, data compiled by Bloomberg show. It was the smallest yield penalty for California since 2008.
While U.S. states face automatic spending reductions and the scheduled expiration of tax cuts from the presidency of Republican George W. Bush, Texas has several attributes in its favor, said Robert Dye, chief economist at Comerica Inc. in Dallas.
The second-most-populous state and biggest U.S. oil- producer, Texas benefits from crude futures prices that have risen about 18 percent from a nine-month-low in June; a population that is younger than the U.S. average; and policies that limit state spending, Dye said. The rate of job growth in the Houston and Austin areas will probably be double the national average this year and next, while Dallas and San Antonio are also outpacing the U.S., he said.
“Even if the economy weakens more than expected, I think we’ll see a similar pattern as in 2008 and 2009 when Texas was last in the recession and first out,” Dye said.
Only California and Virginia stand to lose more jobs than Texas from the federal spending cuts, according to Fuller’s July study, which was prepared for the Aerospace Industries Association. The reductions would cost California about 225,000 workers, compared with about 208,000 in Virginia.
The jobless rate in Texas was 7.2 percent in July, compared with the 8.3 percent national average. California’s was 10.7 percent and Virginia’s 5.9 percent.
Automatic reductions in federal spending, including defense, would begin Jan. 2 unless Congress acts, after lawmakers failed last year to cut deficits by at least $1.2 trillion over a decade. The White House on Sept. 15 estimated fiscal 2013 cuts would amount to $109.3 billion, equally drawn from defense and non-defense programs.
Lawmakers don’t plan to address the issue in earnest until after the Nov. 6 presidential election.
Compared with top-rated states, Texas is less vulnerable to defense-industry cuts, according to a report this month by Michael Zezas, a municipal strategist at Morgan Stanley in New York.
The impact “is not a great enough magnitude to take down the state,” said Ray Perryman, an independent economist in Waco, Texas, and former professor at Baylor University. “If you were to close every base and hospital in San Antonio, certainly that would have an impact, but that’s very unlikely.”
In trading yesterday, the yield on benchmark tax-free debt due in 10 years was little changed at about 1.78 percent, according to a Bloomberg Valuation index. The interest rate set a record low of 1.63 percent in July.
Following are pending sales:
NEW YORK CITY plans to borrow a combined $1.2 billion of general-obligation bonds this month and next to refund debt and finance capital projects, according to the city’s Office of Management and Budget. The sales include both fixed-rate and variable-rate debt. (Added Sept. 21)
MASSACHUSETTS plans to issue $1.6 billion of general- obligation debt via competitive sale as soon as next week, data compiled by Bloomberg show. The debt will finance capital projects. (Updated Sept. 20)
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