Most Buying Since August Propels 50% Borrowing Leap: Muni Credit
Investors are pouring the most money in two months into the $3.7 trillion municipal market, helping U.S. local governments lower costs during the biggest borrowing wave since June.
Individuals added $915 million to muni mutual funds in the week ended Oct. 10, the most since early August, Lipper US Fund Flows data show. With the gain, about $51 billion has flowed in since September 2011. That exceeds the exodus of cash that began in November 2010 and quickened after banking analyst Meredith Whitney’s prediction the next month of “hundreds of billions of dollars” of defaults within a year.
The burst of buying shows investors aren’t shying from yields close to the lowest since 1967. That’s in part because local debt is still cheaper than Treasuries when comparing the asset classes since the recession ended in 2009. The cash wave has been a boon to issuers such as Denver, which was able to reduce yields during an $856 million sale last week for its airport.
“I would have thought weeks ago that inflows would have slowed, but that simply hasn’t happened,” said John Dillon, chief muni strategist in Purchase, New York, at Morgan Stanley Smith Barney, which oversees about $150 billion of the bonds. “There’s been a lot of supply in the marketplace in the last few weeks. The buyers have been handling it very well.”
Local governments recovering from the worst recession since the 1930s have taken advantage of tumbling borrowing costs by issuing 50 percent more than 2011, data compiled by Bloomberg show. Defaults are on a pace to be the fewest in at least three years, helping make state and city debt a haven amid Europe’s debt crisis and running counter to Whitney’s prediction, made on CBS Corp.’s “60 Minutes.”
Twenty-year general-obligation bonds last week yielded 3.64 percent, according to a Bond Buyer index. The interest rate touched 3.6 percent in January, the lowest since 1967, when Lyndon B. Johnson was president.
“Somewhat begrudgingly, investors have said, ‘I have to accept these rates if I want the lower risk profile of munis,’” said John Hallacy, head of muni research at Bank of America Merrill Lynch in New York. Even with three California municipalities filing for bankruptcy since June, “it’s still a market where there’s relative stability.”
The tax-exempt market has returned 6.8 percent this year through Oct. 11, while Treasuries have earned 2.1 percent, Bank of America data show. That’s the biggest differential for the period since 2009.
Benchmark 10-year tax-exempts yield about 1.65 percent, data compiled by Bloomberg show, compared with 1.66 percent on similar-maturity Treasuries. That means the muni yield is about 99 percent of the federal interest rate, compared with an average of 96 percent since June 2009, and 93 percent since 2001, Bloomberg data show. The ratio is a gauge of relative value between the asset classes.
Relative to Treasuries, “we’re still so cheap,” said Thomas Metzold, co-director of municipal investments in Boston at Eaton Vance Management, which oversaw about $185 billion as of Dec. 31. “In 2007, we were at 85 percent. We’ve got a long way to go until we get back to rational valuations.”
Last week, the Massachusetts School Building Authority, which funds capital projects, increased its issue in response to demand, according to Alan Schankel at Janney Montgomery Scott in Philadelphia. The agency sold about $916 million, up from an initial plan for $725 million, data compiled by Bloomberg show.
In Denver’s sale for renovations at Denver International Airport, investors’ orders outstripped availability, allowing the city to reduce yields as much as 0.10 percentage point, said Cary Kennedy, the city’s chief financial officer. The bonds are backed by revenue from the airport.
“There was a lot of volume this week, but DIA’s bonds performed very well,” she said in an Oct. 12 interview. “We were very pleased with the investor demand. It allowed us to achieve substantial savings for the airport.”
The flood of sales may not be over, as states and cities prepare to sell the most debt in four months. The average 30-day visible supply last week was about $10 billion, the most since mid-June, data compiled by Bloomberg show.
October has been the biggest month for local-government issuance over the past three years, Bloomberg data show. That’s one reason munis on average have lost 0.41 percent in October since 2001, the steepest decline for any month, Bank of America data show.
Following are pending sales:
CALIFORNIA plans to sell about $550 million in general- obligation refunding bonds as soon as Oct. 23, according to the state treasurer’s website. The debt will be sold via auction. (Added Oct. 15)
New York’s METROPOLITAN TRANSPORTATION AUTHORITY is set to issue as soon as this week $950 million of revenue bonds to refinance debt sold in 2002, according to offering documents. (Updated Oct. 12)
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